UBS Q3 Earnings Call Transcript

123jump.com Staff
13 Dec, 2010
New York City

The financial services company reported total operating income increased 15% to Sfr6.658 billion from last year''s Sfr5.766 billion. The company generated net profit of Sfr1.664 billion or Sfr0.43 per share compared to a loss of Sfr564 million or Sfr0.15 per share in the year-ago period.

UBS AG ((UBS))
Q3 2010 Earnings Call Transcript
October 26, 2010 3:00 a.m. ET

Executives

Caroline Stewart – Head, Investor Relations
John Cryan – Chief Financial Officer

Analysts

Jon Peace – Nomura Asset Management
Kinner Lakhani – Citigroup
Fiona Swaffield – Execution Noble
Kian Abouhossein – J.P. Morgan
Derek de Vries – Bank of America/Merrill Lynch
Jacques-Henri Gaulard – Autonomous Research
Matthew Clark – Keefe, Bruyette & Woods
Huw Van Steenis – Morgan Stanley
Christopher Wheeler – Mediobanca SpA
Jernej Omahen – Goldman Sachs
Robert Murphy – HSBC

Presentation

Caroline Stewart

Good morning, everyone and welcome to our third quarter results presentation. My name is Caroline Stewart and I''m the Head of Investor Relations at UBS. This morning our Chief Financial Officer, John Cryan, will take you through the results and then we''ll be very happy to take your questions.

Before we get started, I''d like to highlight this slide which contains our cautionary statement with regard to forward-looking statements. And I''d ask you to take some time to read it. With that, I''d like to hand over to John.

John Cryan

Good morning, everyone and welcome to the webcast. It''s my pleasure to take you through the details of our results for the third quarter of 2010.

We made a bottom line net profit attributable to our shareholders of 1.7 billion francs or diluted earnings per share 0.43 Rappen. About half of this amount comprises a net tax credit, which I''ll cover in more detail later.

All of our businesses report lower revenues quarter on quarter as a result of lower levels of client engagement. The results of most of our divisions were also heavily impacted by the 9% fall in the value of the U.S. dollar against our reporting currency. Our overall invested asset base held up despite the effects of heavy foreign currency depreciation. This was in large measure thanks to strong market performance.

We further strengthened our capital base and reported Tier 1 ratio of 16.7%, notwithstanding having called a $1.5 billion hybrid capital instrument. Our core Tier 1 capital was 29.6 billion francs at the end of September, representing 14.2% of risk-weighted assets, as calculated on a Basel II basis.

Our annualized return on equity year to date has been 17.6%, well within the range of the medium-term target we set last year. This waterfall chart shows the principal quarter-on-quarter changes in our net profit attributable to shareholders.

The narrowing of our credit spreads over the quarter reversed some of the own-credit gains in Q2, with an aggregate delta of almost 1 billion francs. Our operating income, excluding own credit and credit-loss expenses, nevertheless fell quarter-on-quarter by over 1.6 billion francs. This was principally as a consequence of the unusually low level of client activity. To mitigate the impact of lower revenues, we cut our expense base.

We''ve recognized a net income tax benefit for the quarter of 825 million francs. The principal component of the tax line is a credit to income of 882 million francs and the remeasurement of the deferred tax assets recognized on our balance sheet in respect of tax losses incurred in previous years in the United States of America.

This was partly offset by amortization of deferred tax assets held against prior period losses recognized in Switzerland, net of the recognition of the deferred tax revaluation benefit that I mentioned last quarter. The net amount of the two items relating to Swiss tax was a charge of 272 million francs.

We were also able to recognize an aggregate credit of 246 million francs as a consequence of agreeing previously opened prior-year tax positions in a number of jurisdictions. And, finally, we incurred a smaller net charge of 31 million francs, largely representing current tax payable, again in a variety of locations.

The recognition of deferred tax assets through the P&L is governed by standards that requires annual pro rata (inaudible) recognition. So, for example, the $900 million credit we took in Q3 in recognition of U.S. tax losses represents three-quarters of the overall amount of $1.2 billion. The remaining $300 million will be recognized in Q4 together with the final installment of the other deferred tax remeasurement for the year.

As a consequence, I now expect that the overall effective tax rate for the Group for 2010 will be close to zero. I''ll take you through each of the divisional results in a moment. Overall Wealth Management''s results were unsatisfactory, Retail & Corporate and Global Asset Management both reported relatively stable results and Wealth Management Americas and the Investment Bank showed operating losses.

At Wealth Management Americas, we''ve completed our restructuring work and there are now signs that the division can return to sustainable profitability. The Investment Bank reported a loss, mainly due to low client-driven revenues and the negative impact of own-credit effects as our credit spreads tightened across the board.

The Corporate Center results reflect a gain of 293 million francs on the valuation of our option to acquire the equity of the SNB StabFund. This slide shows divisional pre-tax profits year-to-date compared with the same period last year.

You will see that all the divisions have improved performance year-on-year, though restructuring work has weighed on Wealth Management Americas, which has not yet returned to profit. The standout improvement is clearly in the Investment Bank, which has reported a year-on-year net increase in reported profit of almost 8.5 billion francs.

We brought expenses down by nearly 6% quarter-on-quarter on an adjusted basis. We cut personnel expenses by 10%, as we reduced our bonus accruals to reflect lower revenues. Non-personnel expenses increased by 4% on an underlying basis, largely reflecting increased litigation charges, the cost of relaunching the UBS brand and our sponsorship arrangement with Formula 1.

We expect to meet our target for 2010 of keeping our fixed cost base below 20 billion, though it''s fair to say that we experienced a helpful tailwind in Q3 from the heavy depreciation of the U.S. dollar and the British pound against the Swiss franc.

Moving on to the divisions, Wealth Management and Swiss Bank''s revenues fell 6% on the second quarter results. The principal driver of the fall was the 19% decline in trading-related income and brokerage fees, reflecting exceptionally low levels of client activity, particularly over the summer holiday season.

Recurring income was also down. Fees charged on the balance of invested assets declined. This was because billings for a particular period are generally based on asset balances at the end of the prior period. The fall in asset values at the end of the second quarter and the impact of the strengthening of the Swiss franc against the U.S. dollar both had an adverse impact.

The overall 7% decline in revenues in Wealth Management was accompanied by a 3% increase in expenses. The increase in expense was however largely because we took a lease termination charge against the Curzon Street premises in London and Wealth Management has allocated a significant proportion of the costs of our branding and sponsorship initiatives.

The net new money picture continued to improve. We saw good inflows from our global ultra-high net worth client base and from clients in Asia and net inflows in the quarter in the Swiss domestic business. However, we continued to see net outflows from our international businesses, though these declined to 1.1 billion francs from 3.9 billion francs in Q2.

The gross margin in Wealth Management slipped to 89 basis points per annum, compared to 95 basis points in the prior quarter. This was a consequence of two factors. First, the gross margin in Q2 was boosted by the decline in the balance of invested assets over the quarter, whereas there was no impact from this effect in the third quarter. This effect caused around one-third of the decline in the gross margin.

Secondly, transaction-based income, for example brokerage fees, commission income and brokerage-related foreign exchange trading income, was unusually low, even for the summer months. Improving the profitability of Wealth Management remains a key priority. We continue to make underlying progress in reaching our medium-term target of 100 basis points of gross margin.

Pricing discipline had a positive effect on underlying revenues and we also slightly increased our Lombard lending balances. The balance of invested assets at the end of the third quarter was in line with its starting point at the beginning of the quarter. Good market performance, the 2% appreciation of the euro against the Swiss franc and net new money inflows, were mostly offset by the 9% decrease in the value of the dollar against the franc.

In Wealth Management, 33% of invested assets are denominated in euros and 31% are in U.S. dollars. In the third quarter, we saw a slight increase in client adviser numbers. At our forthcoming Investor Day, we''ll be providing you with more information on the impact of our hiring and training initiatives for client advisers.

The Retail and Corporate segment turned in another steady performance in the third quarter. Business volumes fell slightly over the summer, reflected in 3% lower revenues. We continued to experience pressure on interest margins from the flat yield curve. The segment continued its excellent credit track record with minimal credit losses recorded in the quarter. Expenses were held steady, though lower revenues contributed to a slight deterioration in the cost/income ratio to 53.4%.

Last quarter, I mentioned some concern about house-price inflation in certain regions, especially around the lakes of Geneva and Zurich. To put this in context, this slide provides details of the spread of loan-to-value ratios in our Swiss residential mortgage book.

Around 99.5% of the residential mortgage portfolio has an LTV below 80%. LTVs are reassessed regularly and we run stress tests for negative equity in the portfolio. We currently calculate that a 20% fall in the value of single and multiple family homes nationwide would result in borrowers facing negative equity in a gross aggregate amount of only 700 million francs. In addition to high over-collateralization levels, debt-servicing levels remain extremely high and arrears remain low.

Revenues in Wealth Management Americas fell by 10% on the second quarter, eight percentage points of which was attributable to currency translation effects. In dollar terms, revenues fell 2%.

The factors that caused the decline in revenues were the same as those impacting our other wealth management operations. Account billings are based on the previous quarter''s closing invested asset balance, which had fallen on market performance in June.

Recurring income was 63% of total operating income, in line with the prior quarter. Non-recurring income fell 10% on low transactional revenue. The gross margin decreased seven basis points per annum to 77 basis points, largely due to the 10% fall in revenues on an average invested asset base that declined by only 2%.

Approximately four basis points of the decrease were attributable to currency translation effects, while the first-time inclusion of 21 billion francs of retirement-plan assets managed by but held in custody away from Wealth Management Americas, lowered the gross margin by a basis point. Expenses fell 11% quarter-on-quarter. Excluding ForEx effects, the decline was 3%. The third quarter includes a provision of 78 million francs due to an unexpected result in an arbitration case.

The number of financial advisers increased slightly in the quarter on the back of our recruitment programs. Net new money inflows were 0.3 billion francs, an improvement from outflows of 2.6 billion francs in the second quarter. For the third quarter in succession, we recorded positive same-store net new money and including interest and dividend income, net new money was 4.6 billion francs.

Revenues in Global Asset Management fell 9% on Q2. Expenses fell 11%, all of the reduction being in personnel expenses. In both cases, the depreciation was the dollar against the Swiss franc as the most important factor.

In the second quarter, we saw net new money inflows of 3.4 billion francs, but these dropped to almost zero in the third quarter. Net outflows from our Wealth Management businesses fell to 1.4 billion francs from 7.5 billion francs of outflows in Q2.

Inflows were boosted by the transfer of investment management responsibility, the 2.5 billion francs of U.S. funds-of-hedge-funds from Wealth Management Americas to A&Q. Net inflows from third parties decreased to 1.5 billion francs from 10.9 billion francs in the prior quarter.

In traditional investments, equities recorded inflows of 1.5 billion francs, mainly into passive strategies. And fixed income saw inflows of 2.3 billion francs, mainly into U.S. short duration bonds and into passive global bonds. Invested assets fell by 2 billion francs to 567 billion francs, primarily due to negative currency effects, mostly offset by positive market movements. The overall gross margin was 33 basis points per annum, down three basis points from Q2.

The IB reported a pre-tax loss of 406 million francs for Q3 compared with a profit of 1.3 billion francs in the second quarter. The biggest single factor in the deterioration was the impact of holding certain of our financial liabilities at fair value.

In the third quarter, we recognized a charge at 387 million francs on the tightening of our debt curve compared with a gain of 595 million francs in the second quarter. In credit and emerging markets bond trading, as well as in M&A and DCM, we saw improved results quarter-on-quarter but these were more than offset by weak performances in foreign exchange, rates, cash equities and equity derivatives.

In response to weaker markets, we cut personnel expenses. Change in personnel costs quarter on quarter is also impacted by the charge to the IB results in Q2 of 228 million for the U.K. Bank payroll tax.

The third quarter was characterized by low levels of client activity, particularly in trading. The example we show here is the volume of shares traded on the New York Stock Exchange. It was also marked by lower levels of volatility than those we experienced in Q2. This was the case in both equities and FX, and these conditions underpinned the disappointing performances of FX, cash equities and equity derivatives.

Our average one-day 95% VAR increased by just over 20% in the quarter to 58 million francs. The increase was largely driven by increased credit spread risk and some increase in interest rate risk. The preponderance of credit risk in VAR reduced the diversification benefit.

On a Basel II basis, the increase in credit-spread risk fed through to a significant increase in market risk, risk-weighted assets albeit from a low base. In the quarter, we continued to manage down our legacy risk positions at little or no cost to the bank.

Equities had a weak quarter. Cash trading revenues fell significantly on low levels of client orders. The experience in derivatives trading was similar, though in equity linked we took mark-to-market valuation gains as sentiment in the sector improved. Prime brokerage recorded lower levels of securities financing after a strong second quarter. ETD commission levels fell in line with client activity.

Revenues in FICC as a whole fell significantly quarter-on-quarter, partly attributable to a decline in revenues in FX and rates. The results were also impacted in the FICC Other segment by a charge for unhedged debit valuation adjustments of 0.2 billion francs and by a significantly lower contribution from our legacy positions compared with our contribution in Q2.

Credit sales and trading had a good quarter with revenues up by over 25%, with a particularly strong performance by the client solutions teams. Client trading revenues increased as volumes and bid offer spreads improved, especially in Europe.

In Macro, revenues fell to just 291 million francs, on very subdued volumes and tighter spreads in both rates and FX. Emerging markets saw improved volumes and better results from all markets, especially in domestic market bond trading.

Other FICC revenues were negative 127 million francs, compared with positive 502 million francs in Q2. Losses on fair value adjustments from the tightening of our CDS spreads in the quarter were almost 200 million francs compared with a gain of 280 million francs in Q2. The balance of other revenues was driven by losses on hedges, offset in part by gains in our remaining exposure to monoline bond insurers.

Revenues in advisory and global capital markets increased to 583 million francs. The improvement quarter-on-quarter was more than offset by mark-to-market losses of 161 million francs on hedges against our franchised lending book.

Advisory revenues improved by 44% on the previous quarter, notwithstanding a 9% contraction in the global fee pool. Again market share in ECM this quarter, although revenues declined. In DCM, however, revenues were up substantially with strong performances, especially in the USA.

Our capital ratios further improved in the quarter. Our Tier 1 capital ratio was 16.7% at the end of September. Risk-weighted assets increased by 3.5 billion francs to 208 billion francs. Tier 1 capital increased by a net amount of 1.1 billion francs to 34.8 billion francs after taking an additional charge of 0.5 billion francs net of a 1 billion francs reserve, to redeem $1.5 billion of trust-preferred securities.

The next first call date for one of our hybrid issues is June 26, 2011, when a $500 million instrument becomes eligible for redemption. We increased our core Tier 1 capital over the quarter to 29.6 billion francs. It now represents 14.2% of our risk weighted assets. We''ll continue to retain earnings in order to reach our core Tier 1 capital target range of 45 billion francs to 50 billion francs.

With that, Caroline and I now have some time to take your questions.

Question-and-Answer Session

Operator

First question from Mr. Jon Peace, Nomura. Please go ahead, sir.

Jon Peace – Nomura Asset Management

Yes, good morning. I just -- I have two questions, please. The first is that in your outlook statement you talk about a pickup in activity across the bank going into Q4. I realize that''s very early days, but I just wondered if you could provide a little bit more color as to how strong that pickup is?

And the second thing was about your net new money flows. You''ve obviously showed a nice trend towards, a move towards positive inflows, but these can be quite lumpy in the short term. How confident are you of the momentum behind that? And should we continue to see inflows improving going into the end of the year and into 2011? Thanks.

John Cryan

Thanks, John. You''re right. In our outlook statement today, we are giving slightly more positive views on the level of client engagement with the bank. There has been an uptick. It''s not saying very much because over the summer months the levels of client activity were very, very low across all the divisions.

So all we''re seeing is more of a reversion to what we hope is a normal trend. I still think that there appears amongst our client base to be a lack of conviction about the direction in which the markets are moving. I wouldn''t bank on there being a bumper quarter. It''s difficult to say. It''s very early days. But we did want to flag that we''re not experiencing the malaise that we saw in, particularly in July and August.

On the net new money front, I''ve tried subliminally to play this down a little bit on the basis that I didn''t want to get too excited by one quarter, particularly as the quarter has in it a couple of reclassifications and also because the quarter''s a difficult one to gauge. It''s one out of a number of quarters. We won''t call this a victory until we see a number of quarters of sustainable and much higher levels of net inflows.

We did however want to focus people slightly away from net new money, more back to the balance of invested assets because it''s really that that drives the profitability of the bank, rather than the flows themselves, although clearly without positive inflows, it''s more difficult to grow the invested asset base. At the moment, we''re not, we''re certainly not claiming a victory. It''s not necessarily an inflection point.

These flows are very lumpy, as you say, and I''d much rather deliver a number of quarters of performance and then say that we''ve achieved the goal. What I could say though, which is a more positive point, is that the work that we''ve done to try to remedy the situation appears to be bearing some fruit and so it''s another milestone on the road to recovery, but it''s just another milestone.

Jon Peace – Nomura Asset Management

Thank you.

Operator

Next question from Mr. Kinner Lakhani, Citigroup. Please go ahead.

Kinner Lakhani – Citigroup

Yes. Hi. Good morning. Yes, I wanted to ask you two questions. Firstly, on the Investment Bank, I just wanted to try and understand how you guys are seeing your market shares across your key sales and trading franchises, so FX rates, equity derivatives and cash equities. And I''m thinking on a year-on-year basis and maybe more short-term on a sequential basis and related to that, also could you quantify and maybe explain a bit more the mark-downs on non-linear rates positions that you disclosed in this quarter?

And then my second question was on Wealth Management and just to try and understand what your views are in terms of the potential impact of a potential German/Swiss double-tax treaty. Thank you.

John Cryan

Thanks. On market shares, I think the market share movements, we showed some on the slide for IBD and the capital markets businesses. I think particularly within FICC and Forex, there''s no doubt that we have certainly slipped in market share. In rates, we never had very much in the first place that''s a market in which virtually all banks participate. And so I''m not sure we particularly use market share as a determining factor there, but it''s been very low and it''s possibly got slightly lower.

The area where we''ve seen a considerable improvement is in credit, where we had nearly no market share over a year ago and now we have some market share. I think the general improvement in the FICC division is certainly within the credit businesses. In FX, I think we need to pull our socks up a little bit and try and recover a bit of market share, which we have definitely lost.

On the non-linear rates positions, it''s a very complex area. Pre-crisis, we wrote a number of very long dated, very, very complex swap and swaption-type trades and those trades are extremely difficult to value. The technology in that market has changed and approaches to valuation have changed and as we''ve tried to improve the estimate of the carrying value of those positions, we''ve seen for a few quarters now the mark-downs on the carrying value of those positions.

We do continue to try to refine them but they''re positions that we -- they''re difficult to risk manage because some of them are very, very long dated. They''re not particularly pernicious. I''m not worried about the safety of the bank because of them. But they are difficult to value and unfortunately over the past few quarters we''ve seen mark-downs.

On the separate subject and it''s a topic that''s in the press this morning is this agreement to agree that the Swiss and British governments seem to have struck and the likelihood of a similar arrangement being agreed with the German government. I think it''s too early for us to say what sort of impact that would have on us. Clearly, it will impact us. We''ve already said that we have money in our bank from residents of both the U.K. and Germany so it will have an impact. But I think it''s too early to say what that impact would be, not least because, as far as I can tell, the agreement, at least with the U.K., is an agreement to agree rather than the final agreement itself.

Operator

Next question from Ms. Fiona Swaffield, Execution. Please go ahead.

Fiona Swaffield – Execution Noble

Can I ask on the Wealth Management division and the cost base and the personnel expenses, they seem to be up slightly if you take out the 15 million francs in Q2 and obviously the revenues are down. So could you talk through that? And also, could you remind us of the impact on the P&L from the dollar, maybe particularly in Wealth Management? Would it have been a big negative in the quarter and also at the Group level?

And then on the deferred tax and the U.S., obviously you said there''s a bit more to come in Q4. Could that -- is there more to go longer term? And have you -- is there any kind of feel for what''s driven this? Is it a higher pre-tax assumption than you originally went in with or could you just talk through the dynamics there? Thanks.

John Cryan

On the Wealth Management cost base, you''re right about personnel expenses. They are up. The fact is that there''s been a shift in the mix of personnel. We are hiring more onshore wealth management staff in more expensive locations. There''s certainly been some inflation in personnel expenses, particularly in Asia, where the market for Wealth Management client advisers in particular is quite hot.

But generally recruiting people onshore, as the market shifts from offshore to onshore, is a more expensive proposition. So I fear that that''s a trend although not a particularly worrying trend I think, but it''ll nevertheless mean that there is inflation in personnel costs in Wealth Management going forward. On the…

Caroline Stewart

U.S. dollar.

John Cryan

The U.S. dollar. On the Wealth Management business, the U.S. dollar has some impact. Generally speaking in the Group, we pay a lot of our most expensive people in U.S. dollars and British pounds, and that was the tailwind that I mentioned in relation to our fixed cost base. A lot of people in New York and London obviously are -- we pay expenses in all sorts of currencies, but the dollar and the pound are important ones.

In Wealth Management, the dollar is proportionately less important. We have people in Asia where they are paid in currencies that are pegged to the dollar. But Wealth Management in particular is still Swiss franc and euro based as well. But it has something of an impact, but less of an impact in Wealth Management and certainly in Wealth Management and Swiss Bank there''s a much heavier proportion of Swiss franc.

On the deferred tax asset, this is an exercise we carry out around this time every year. It impacted the fourth quarter last year and third quarter the year before. So it''s around about this time that we remeasure our deferred tax assets. The increase, as I mentioned, was driven by an amount that we took in Q3, which was actually higher than the net tax credit and that was calculated in relation to our U.S. taxable profits.

We look at the prospect for our businesses each year. We build a five-year business plan, which we send to the Board for approval. But in the construction of that plan and with our experience year-to-date, it became clear to us that we were starting to generate a meaningful amount of taxable profit in the U.S. and the prospect was that we would be able to do that in the future.

What we''ve done during the crisis is we had applied significant haircuts to the business plans that we''ve produced during the crisis, particularly in relation to the IB, where in fact we''d haircut the prospect of making taxable profits in the U.S. by 75% in assessing our deferred tax balances. And in the light of our experience this year, holding that haircut at 75% was no longer sustainable and so we reduced it to 50% and the impact of that was to require us effectively to remeasure up the deferred tax assets we hold in the U.S., and that was an amount of about $1.2 billion. We take three-quarters of that for the three quarters to date, and $900 was 882 francs.

As to whether there''s more to come in future, if there were then we''d obviously have to -- we''d have to have reflected that in our remeasurement. At the moment, we don''t have concrete visibility on the future profitability. But I would have thought next year when we look at the matter again -- and we look at it on a period basis, as I said. Next year, it''s in the context of producing our five-year business plan; not just on an annual review of our deferred tax assets.

We feel even more confident that we can either reduce the haircut or we have better visibility on future taxable profits in U.S. And we could write that up further, yes, that''s right. Hopefully we''re never in the position where we have to impair it or write it back down again. But we feel fairly confident that the number we have now is the right number in the context. It still implies some sort of model reserve or haircut against the businesses'' view of their own profitability.

The reason for the haircut is, there''s obviously a degree of risk attaching to future profits. We''re going out for five years in our business plans and also there''s little visibility on the legal entities on which those profits arise so it''s difficult to say whether they''d arise in the relevant places in the U.S. But that was the background to that.

Your last question was -- was that -- that was the longer-term question on deferred tax assets, yes?

Fiona Swaffield – Execution Noble

Yes, that was it. Thanks.

John Cryan

Thanks, Fiona.

Operator

Next question from Mr. Kian Abouhossein, J.P. Morgan. Please go ahead, sir.

Kian Abouhossein – J.P. Morgan

Yes, two questions. The first one''s on the IB. If I look at your medium-term targets that were given, slide 21, you clearly talked about 14 billion francs of costs, 20 billion francs of revenue, 70% cost/income. Now the cost side looks not too far off from your medium target. The revenue side is clearly way off. How should we think as investors/shareholders about how you manage costs against the revenues? And in that context, of your 3.2 billion francs of deferred comp, variable deferred comp, how much is actually vesting in 2010?

John Cryan

On the revenues in the Investment Bank, I think that the message for today is that unfortunately, given the change in the business mix and the focus on client-based flow trading, we are inevitably going to see much more volatility in revenues than we would have seen from the business model pre-crisis, where we had a lot of carry trades that were at least for a while earning a positive yield. And so we have to cope with much more variability in the quarterly revenue picture from the Investment Bank.

What we''ve tried to do is make our cost base as flexible as possible and it''s difficult to do that; you''re absolutely right. So what you''ve got to do is you''ve got to make the base level as low as possible. And that''s been difficult because of the change in the market particularly for personnel, where fixed personnel costs have increased. So we''ve tried to retain or maintain a cost base that''s as efficient as possible to support the production of revenues that fall within the range of our medium-term target, but where there''s a variable element, which is largely compensation-related.

Now, we took over 730 million francs out of our cost base in the quarter, but I don''t think we could take that amount further out if we had a further four quarters. So you''re right to focus on the fact that ultimately we have operational leverage, which works against us, at times when revenue levels are relatively low.

And on the deferred compensation, we, for last year''s bonus awards, I think we said that there was about 1.5 billion francs of the amount of the award whose accounting recognition was pushed forward into future periods. And we said that approximately two-thirds or so of that would need to be recognized in the first year. So, of the prior year''s variable compensation, there''s roughly 1 billion francs or so, a little bit less than that, I think, now, because of staff turnover, but it''s roughly that sort of number, which is effectively therefore a fixed element in this year''s IFRS accounts.

Kian Abouhossein – J.P. Morgan

And in respect to staff numbers, should we expect a material change from this level? And where have you actually hired roughly 500 people?

John Cryan

Well, some of them have been client advisors. And we do have hiring programs. Q4 is not going to be a big hiring quarter; it never is. It''s not commercially rational to hire people in Q4 because you end up paying a bonus from a different bank. But I would have thought that in Q1 we would see some increase in numbers. We are actively hiring client advisors in all of our asset-gathering divisions. We are still, to some extent, building out the IB, particularly in sales and trading. And I think we''ve lost some people in IBD. And therefore there will be a little bit of a rebuilding that needs to be done there, particularly in the U.S., where we''ve lost some expertise in some core sector teams.

But, generally speaking, I don''t think there''s a need to massively increase our headcount. It''s still pretty much under control. I think, compared with most of our peers, we still run light. But I wouldn''t expect a massive increase in headcount over the coming year or so, over and above those points that I just made.

Kian Abouhossein – J.P. Morgan

And if I may, one more question on litigation, page 70 in your report. At what point do you actually record a litigation charge as material and put it in a release like that? What is the kind of quantitative impact that needs to be decided before putting it in here?

John Cryan

There are rules in IFRS about when to take provisions. I think they have to be quantifiable and they have to be estimable. And there are special rules sometimes that apply to litigation where, for commercial reasons, you can''t set up -- it''s bad practice to set up a litigation provision because you''re inviting the other side to take it. But the probable and estimable test is the one that applies.

Kian, Caroline''s just reminded me that in relation to your prior question, I probably didn''t answer the question fully. You asked about the 500 increase in headcount this quarter.

Kian Abouhossein – J.P. Morgan

Yes, in the 450 in the IB.

John Cryan

Yes. I did write that down. I forgot to answer it. A lot of that is the graduate recruitment season, which is particularly big, as you probably know, in Europe, and especially in the U.K. So we had our annual influx of graduates and then we have the apprentices in Switzerland came onboard.

Kian Abouhossein – J.P. Morgan

Okay. Thank you.

Operator

Next question from Mr. Derek de Vries, Bank of America/Merrill Lynch. Please go ahead.

Derek de Vries – Bank of America/Merrill Lynch

Thanks. I actually want to go back to a couple of the areas that Kian just touched on. First, just very quickly on the provisions for legal risk, you allude to this, but that''s run down from a 1.4 billion francs at the end of 2008 to 1 billion francs in 2009, down to 448 million francs at Q3. So does that mean you''re, I guess, half as worried about legal risk as you were at the beginning of the year and a third as worried as you were at the end of last year? It just seems sort of odd given where we are in the cycle and lawyers'' fees and whatnot. So that''s on provisions for legal risk?

Then Kian also asked about the deferred comp. And here I think Credit Suisse gave us some numbers. They said that 910 million of their quarterly comp expense was related to deferred comp, and in aggregate they had 3 billion of unrecognized comp expenses. I was wondering if you could give us those same numbers?

And then finally, a new question, not to steal all of Kian''s questions. On Basel III, you''ve give us very good disclosure on what could happen to your risk-weighted assets, as well as your common equity Tier 1 capital. I''m wondering what probability you put on further changes to the calculations of that under Basel III. And here I''m thinking specifically of CVA. Do you think it''s possible, as we get to the end of the year, you''ll see some changes in that CVA calculation? And that could be, I guess, either a positive or a negative, but I''m thinking positive here?

John Cryan

Thanks Derek. On Note 14, which is I think where you got your numbers from in the accounts, the provisions, that note is unfortunately not indicative of our expectations of having to make provisions. The simple answer is it''s a little like bad debt provisions when they go down sometimes. It''s simply because you''ve written off the bad debt, the provision disappears. These are provisions that are actually being used. And the delta in the third quarter in the litigation provision, it went from 783 million francs down 448 million francs.

The lion''s share of that is actually the payment of the final installment of the $780 million fine and charge that we incurred in relation to the cross-border case. It''s actually using the reserve that we set up and actually paying over the provision as far as that comes down.

Derek de Vries – Bank of America/Merrill Lynch

Okay.

John Cryan

On deferred comp, we are, we''re under an obligation anyway by the FINMA at the end of the year to improve substantially the disclosure we give you on deferred compensation. In fact, we will be disclosing it warts and all. And we were planning to do that only at the end of the fourth quarter. The only help I can give you so far is the point that I made in relation to Kian''s question, which is we didn''t really pay much in the way of bonuses that had a deferred element to them during the crisis. The first year in which deferred compensation is much relevant is the 2009 performance year. 2007, we didn''t pay under our standard plans. And in 2008, frankly, most of my colleagues would agree we didn''t really pay, and so there was nothing to be deferred. There is this cash plan, CVCP, which has a very small effect, but it was tiny in the context of our overall bonus plan.

The one that''s relevant is the normal bonus plan from 2009 and the deferred element of that, i.e. the amount that was pushed in our IFRS accounts into future periods because it was still at risk in the hands of the recipient, was about 1.5 billion francs. And it''s recognized over, predominantly over three years on a concave curve, and about two-thirds of that gets recognized this year. So this year''s about, is around about 1 billion francs of that, roughly speaking. And then future years would be round about 0.5 billion francs.

Now, what we pay this year will be on probably a similar plan and there''ll certainly be a significant element of deferral. That''s not agreed yet, neither the amount nor the structure is particularly agreed, but we have been accruing on the basis that there''s a significant deferral element. And, therefore, next year and the years after that will be impacted by this year''s grants.

On Basel III, I''m not, never very good at predicting these things. However, I think there is quite a strong body of evidence that suggests that you''re right. In particular, the CVA calculation in Basel III needs some further engineering. And I would hate to give you the impression that other people may agree with me and change it, but I think at the moment it does not give an accurate reflection of the risk inherent in hedging of CVA, nor do I think it provides the right incentive to go and hedge it in the first place.

And so logic may prevail and there may be a reassessment of the algorithm that''s used to derive the risk-weighted asset equivalent of the regulatory VAR that drives from the CVA book but it''s more of a hope than an expectation. But I think it would be backed by logic if there were a change. I think at the moment though, one of the driving factors behind Basel III is to act as a deterrent to banks running aggressive trading books. And so for political reasons it may not change.

But if logic were to prevail, I think it should. I don''t know the answer, but I would have hoped that it would ameliorate the impact of the introduction of Basel III.

Derek de Vries – Bank of America/Merrill Lynch

Great. Thank you very much.

Operator

Next question from Mr. Jacques-Henri Gaulard, Autonomous Research. Please go ahead.

Jacques-Henri Gaulard – Autonomous Research

Yes. Good morning, John. Good morning, Caroline. Just two questions. On page 71, about the put back of the RMBSs that you''ve underwritten, you give very good disclosure. I would guess, and I can understand why you wouldn''t be able to give more information about what you expect to be put back, but maybe a bit of color about your level of reserve maybe and how much you''re expecting somehow to be put back, so like a bit of a maybe comparative view of where you stand and how much you could repurchase, I would guess?

And the second question, back to Fiona''s question. Is it -- can we effectively change your tax rate guidance for 2011 or ''12, or do you still feel happy about us maintaining about 25%? And lastly, if we can have a view about the lease termination, because it had an impact on the cost of the Wealth Management and effectively how much it was? Thank you.

John Cryan

On the put back, we tried to give you as much disclosure as we could. For those of you, it''s page 71, Note 15 on litigation. We tried to show you the experience, the actual experience we''ve had so far. There are three categories of -- at issue here. First is mortgage loans that we originated, and they are very small. We''re not really an originator of loans.

Second is other people''s loans we sold. For example, through Wealth Management Americas we white-labeled other people''s mortgages and sold them, that''s a potential area of concern. And then within the Investment Bank, obviously we securitized a lot of loan and we re-securitized a lot. And it''s really in that last category that we -- that the concerns predominantly arise.

And I think it''s very difficult to gauge or give you any guidance on what might happen in future. So what we thought we could do though is give you as much detail as possible on the experience to date, which so far has not been material in the context of our overall results. But obviously, we were a very big participant in the securitization market, but it remains to be seen how that pans out.

Obviously -- but where we''ve securitized and taken -- and been a recipient of representations, then obviously we would have a back-to-back position. The difficulty is where the deliverer of the representation in the first place is no longer around.

Jacques-Henri Gaulard – Autonomous Research

And you are not disclosing your reserve, because some of your (inaudible) they''ve have effectively disclosed where they were.

John Cryan

I think we''ve disclosed what we''ve done so far. There''s not much in addition to that. There''s no further news. On the tax guidance, I think it''s -- we can''t work out what we would do this time next year when we look at our deferred tax position. I think the case is that in Switzerland we''re pretty much done. The big area for potential write-up of deferred tax assets would be in the United States. And, at the moment, there''s no visibility on being able to do that at the moment.

So I think the tax guidance for next year would be that the effective tax rate should be -- I think 25%''s probably a little high. We normally work internally on something in the range of 20%, 22%, that sort of number, but not far off, yes. And then on the lease termination, in Curzon Street, I think the -- in Swiss francs it ended up being 19 million francs.

Jacques-Henri Gaulard – Autonomous Research

Okay. Thank you very much.

Operator

Next question from Mr. Matthew Clark, KBW. Please go ahead.

Matthew Clark – Keefe, Bruyette & Woods

Good morning. I was just hoping if you could give us an update on the StabFund, your thoughts there about whether you might look to repurchase. And then also, just to make sure I understand the accounting treatment, at the moment, your investment is 50% deducted from Tier 1 capital, is that correct? Thanks.

John Cryan

The StabFund has had a very good year. It''s announced that September to date, it''s made 2.8 billion francs. And there''s some interesting things about the StabFund, one of which is that for U.S. tax purposes we benefit quite considerably from some of those profits year to date, so has helped a little bit in the deferred tax reassessment. And that''s because the StabFund is dealt with as a financing transaction, rather like a repo rather than an outright sale for tax purposes.

The repurchase -- we never actually owned it, so technically it would be a first-time purchase of the StabFund entities, is something we intend to do, otherwise we wouldn''t hold any positive replacement value for the option. We do intend to do it. Whether we intend to do it while it still has risk assets in it or whether we wait until everything is turned into cash and it''s just a company sitting on cash, is difficult to say.

I think we -- as I think Ossie Gruebel once mentioned, we did approach the SNB and suggest to them that we buy it, and they declined politely. So perhaps they don''t want to sell it. It''s been a bit of cash cow this, so far this year. So may be that we wait until there''s nothing more than cash in it and that would at least make the valuation of the fund easier to calculate. But we do intend to buy those companies, otherwise we obviously wouldn''t hold a value for the option. And from the regulatory capital accounting, you''re right. We only get credit for half of the value of the option in our Tier 1 capital.

Matthew Clark – Keefe, Bruyette & Woods

Okay. And then just to follow up, am I right to think your incentive to repurchase early would be that you then get 100% of the upside from that point in time onwards, rather than 50% of the upside the longer you wait? Is that the right way to think about it?

John Cryan

Not really, because the price is done at fair market value. So at the time, we would buy the company, we would have to have a valuation done of the company. We then effectively pay an exercise premium of $1 billion, plus half of the net assessed value of the company.

So, for example, at the moment, the company''s, let''s say, worth something like $5 billion. We would pay $1 billion and then we would share the remaining $4 billion 50/50. And so, effectively, we''d pay $3 billion for something worth $5 billion. And with a little bit of a model reserve, in our books at the moment we have the option held at 1.75 billion francs -- I''m sorry, dollars, $1.75 billion.

Matthew Clark – Keefe, Bruyette & Woods

Okay. But if that $5 billion subsequently turned out to be worth $6 billion, then you would pocket all of that $1 billion improvement?

John Cryan

We would then be on risk, yes, that''s right. We would own the company, so you''re right.

Matthew Clark – Keefe, Bruyette & Woods

Great. Thank you.

Operator

Next question from Mr. Huw Van Steenis, Morgan Stanley. Please go ahead, sir.

Huw Van Steenis – Morgan Stanley

Good morning. Most of my questions have been answered, so perhaps just one more general one. How has the first nine months of this year changed the business plan to the way you want to build out in the Investment Bank? And, in particular, if I think about the fixed income division, I note your point that obviously quarterly volatility will be higher than the old model, but it also strikes me that the quarterly volatility''s been a tad higher than many of your peers. And I wonder if that''s because of the slightly low-ish market shares in many of the products means that you have less confidence to trade in tougher markets.

And what sort of consequences does that have? Does that mean you need a much leaner cost base to offset the ups and downs of market or does that mean that you need to redouble your efforts to go for market shares and then you will be seeing significantly higher investment spend as we go into next year? So just maybe some general thoughts about how the tactics of your business plan have changed, given the market environment?

John Cryan

There isn''t a fundamental change in the business plan. I think some of it is still, to be fair to the divisions, some early teething troubles in having rebuilt fixed income from scratch, but I think in some markets we''re still finding our feet. There are some markets in which we are still relatively weak but have performed well. I know we give you a little bit more disclosure than some of our competitors, so it''s difficult sometimes to see where they''ve done well and where they''ve done less well.

But, for example, in high yield in the U.S. we are still not a major player and I know that''s been a very strong market. It''s not an excuse. It''s just one of the explanations as to why, when in fixed income as a whole, some people have done relatively well. We happen to have been stronger in some areas that have not done so well.

Having said that, you''re right. We have underperformed in too many areas. And it may be that we are still a bit-part player in some of them, our market share''s just not big enough. Some of it, I think, is that we are not well enough established in some markets and so the client relationships that we have, we are not top three or top five for a particular client. And so when there''s very little business going around, they tend to stay with the people at the top of their relationship list. And if we''re further down the list, we don''t even get any crumbs that fall from the table.

I think it''s just a question of seasoning the development of that business. We''re not worried that it''s not going right. I think we''re still fairly confident we''re on the right track and doing the right things. But it will be more volatile because we don''t have this bedrock of earnings from having a lot of positions on the book that ostensibly carry a positive yield. We are relying on people wanting to do things with us and wanting to trade with us and have us perform investment banking services for them.

Huw Van Steenis – Morgan Stanley

Thank you very much.

Operator

Next question from Mr. Christopher Wheeler, Mediobanca. Please go ahead.

Christopher Wheeler – Mediobanca SpA

Yes, good morning. A couple of questions. Just going back on to the compensation ratio in the Investment Bank, it''s about 68% if we exclude the own credit costs. I just wanted to get a feel for whether, given the uplift you''ve obviously had to deal with in terms of particularly basic compensation. Are we looking at that 1494 as a number which is a line which you can''t go beyond, because clearly 67% or 68% is a pretty high number, and obviously you''re looking to get below that. So could you just talk about that?

Secondly, on compensation, we''ve all ignored the elephant in the room which is, obviously, what we''ve heard from the business sector in the U.K. and the head of the CBI about warning against bonuses in general. Have you given any thought about how you''re going to deal with this rather messy problem at the end of the year, particularly in the U.K.? And then just perhaps moving on quickly to Wealth Management. In talking about the increase of the financial advisors, from 4,148 to 4,700, can you just give us some flavor as to how much of that you expect to be onshore in Europe, how much in Asia? That would be quite helpful. Thank you.

John Cryan

On the compensation ratio, we tend not to look at it on a quarterly basis. We tend to look at it on a year-to-date basis and on a year-to-date basis, the numbers for the Group and the Investment Bank obviously much lower than the percentage you mentioned, mainly because the first quarter was very strong and the compensation ratio was consequently lower. But the number we have, excluding own credit and the payroll tax, is about 54%, 55% of the IB year to date, which is still a little bit higher than we would expect a longer-term target to be. We''d like to bring it down below 50%.

And we have to work on the basis that we operate in a market for what is called talent and, as a consequence, we have to pay the market or thereabouts. We are a living example of a bank that experimented with not paying people and it didn''t come off very well in 2008. And, as a consequence, we know that we are bound to pay people, to some extent, regardless of the performance of the Bank. Whether we retain their services is a different issue, but if we retain them, we have to pay them to some extent.

As a consequence, there''s obviously a balancing act between the public interest in banks reducing their bonus for compensation payments generally and what it takes to retain and attract staff. I don''t think the U.K. is particularly different from anywhere else. There''s pressure coming from everywhere we operate. It''s maybe more public in the U.K., but it''s nevertheless a factor globally.

Christopher Wheeler – Mediobanca SpA

Sorry, John, so I know this is an incredibly tricky subject, but you''re basically saying you''re sort of -- no disrespect to you, you''re hoping it''s going to go away, which I feel it won''t. And I just wondered, perhaps a personal view on how this could be dealt with in a sensible fashion, because obviously we fully understand the need to retain talent. That''s obvious.

John Cryan

Yes. I''m not sure there''s an easy solution. I think you have to pay because we tried last time not paying and it didn''t work.

Christopher Wheeler – Mediobanca SpA

And so the likely consequence of that is further cost from the perspective of shareholders, I would imagine.

John Cryan

Yes. That''s right.

Christopher Wheeler – Mediobanca SpA

That you''ll be punished. Okay.

John Cryan

For the company, anyway.

Christopher Wheeler – Mediobanca SpA

Yes, of course.

John Cryan

In Wealth Management, the client advisors, we -- the gross numbers are obviously bigger than the net numbers and we are hiring actively in Asia and onshore in Europe. I don''t actually have the exact split for Q3, but both are an area of focus for hiring. And those would be predominantly the areas.

Christopher Wheeler – Mediobanca SpA

Sure. Thank you very much.

John Cryan

Caroline''s just given me some -- it suggests that the majority, just about the majority is in A-Pac in the quarter. But both areas are a big focus for us.

Operator

Next question from Jernej Omahen, Goldman Sachs. Please go ahead.

Jernej Omahen – Goldman Sachs

Yes. Good morning. It''s Jernej here from Goldmans. A few questions left, I guess. Can we start on page 20 of your slide pack? And I would just like to ask you for a breakdown of the increase in core capital, from 26.7 billion francs in the second quarter, so we''re almost 3 billion francs during this quarter. What''s driving that, because it''s obviously not just your redemp profits, I guess?

John Cryan

Yes. Maybe, I don''t know if you can do this, Martin, if we can look at the previous slide to that. We included in the pack -- I think given going forward there''s going to be a lot more interest in the capital of the bank, I think the capital of all banks, we''ve included for the first time what I hope''s a helpful slide; it shows you the movements in the IFRS equity balance. The movements in the quarter for us, in our own shareholders'' equity, the minorities'' position is quite complicated for us because we brought back that hybrid which had been classified as non-owner interest or non-owner equity in the bank.

If you look at the middle column, the one that''s headed ''of which UBS shareholders'', you see the net profit figure there, then you see a number of important movements that build up the delta between the opening balance on July 1 and the closing balance on September 30. And there are a number of relatively large numbers there.

The foreign currency translation account in ''other comprehensive income'' is the biggest single item. It''s almost 900 million francs of charge and that''s simply the result of the biggest item in the foreign currency translation account would be the -- what was the PaineWebber, UBS Financial Services, Inc., the PaineWebber entity that was acquired a decade ago, that''s held at original cost in dollars. And if the dollar falls, it falls in value. And the difference goes through other comprehensive income and impacts equity.

Cash flow hedges is the impact of the macro cash flow hedge in particular, which is the amount that is not taken through P&L, but is, the recognition of it is deferred into equity. The deferred tax, the deferred tax credit to equity, that relates to a couple of items, one of which is foreign currency translation. These are items when the deferred tax is calculated under local U.S. statutory and Swiss GAAP, and the differences in the tax account between IFRS and local taxes goes through equity. And those would relate to things that anyway go through equity, like foreign currency translation.

There''s the impact of compensation plans, the movement in treasury shares, and they will impact the equity. If you turn over the page to the next slide, movement in Tier 1, we start -- or the core Tier 1, we start with the 26.7 billion francs at the end of June. You then add the bottom-line profit, the net profit attributable to shareholders. Own credit, the amount of own credit on the medium-term notes when we disclose own credit is not eligible to capital, and therefore a charge to the P&L is added back. So in effect 2.1 billion francs instead of 1.7 billion francs is taken into the capital, regulatory capital account.

There''s some other very small FX impacts. There''s then this Tier 1 hybrid redemption. There was this odd concept in Q2 that I explained, where in order for there to be a semblance of capital replacement, the deal with did with the FINMA in order to redeem the hybrid instrument was essentially redeem it by assigning core equity to it. So we set up an equity reserve of 1 billion francs by Q2. We added another 0.5 billion francs notionally in Q3. And at the end of the quarter we called the instrument back. It was actually called back on October 1, but the call was made during August, in fact.

And so that instrument was reclassified from equity, where it was held as a minority interest, into a creditor because we had to redeem it. And we were able to release the reserve of 1 billion francs in core Tier 1, because the hybrid was never in core Tier 1. So it''s a slightly odd way of showing this. But essentially, as we showed, I think, in the second-quarter pack, the core Tier 1 capital was 1 billion francs lower than it could have been because there was a reserve set up for redeeming the hybrid. That reserve was released and the net number at the end of the quarter was 29.6 billion francs.

In the Tier 1 capital for that hybrid redemption, you can see the posting of the additional reserve of 0.5 billion francs. And that''s because it was a $1.5 billion deal, but the exchange rate of the dollar versus the franc was about 1 anyway, so it''s lost in the rounding. But essentially it was the 1 billion francs taken in Q2 plus the 0.5 billion francs taken in Q3 was the impact in Tier 1 as a whole, with the hybrid disappearing, but in core Tier 1 it was never there so we got the reserve back.

Jernej Omahen – Goldman Sachs

Okay. That''s clear. Thanks a lot for that. And just the second question on Lombard loans, you mentioned that there was a pick-up in Lombard loan balances during the quarter. I was just wondering what the number was.

John Cryan

Yeah. I don''t have it off the top of my head. It''s tiny. It''s about 250 million francs.

Operator

Next question from Mr. (inaudible) Walterman [ph], Swiss Public Radio [ph]. Please go ahead.

Unidentified Analyst

Yes. Good morning. I have some questions concerning Basel III. You mentioned a couple of weeks ago that in order to reach the new capital requirements that UBS will not pay any dividend. I was wondering if that is still the plan. And for how long will you not pay any dividend? And why is your strategy different from other banks, for instance, Credit Suisse, which will pay dividends in the next couple of months and years?

John Cryan

Okay. Thank you. The answer to that question goes slightly back to the previous slide. We showed on that slide that our core Tier 1 capital is just under 30 billion francs at the end of September. And we announced about a year ago, at our Investor Day last year, we''ve another one coming up in the middle of November, but we said that we thought that the company should hold something between 45 billion francs and 50 billion francs of real equity capital.

And the balance of the core Tier 1 capital at the moment, as consolidated into that account, for example, about 8.3 billion francs of deferred tax assets, many of which will not count, will have to be written off from the capital account under the Basel III regulations. And so our core Tier 1 capital at the moment, if you took off, let''s say, 7 billion francs or so, would be only 23 billion francs.

Now to get to the 45 billion francs to 50 billion francs essentially still means that we need to double the amount of our core Tier 1 capital. But we certainly need to take it from the 30 billion francs or so it is today up by another at least 50% to 45 billion francs. And we believe as a management team that the most prudent way to do that is to do it as quickly as possible. And that''s because we want to fulfill our promise to shareholders that we do not dilute them any further by issuing any more shares as we need capital.

So we think that it''s most prudent for us to retain earnings until such time as we come close to the range of 45 billion francs to 50 billion francs, which is our target range, under the rules that apply in the Basel III convention. So it is difficult for us to compare ourselves with other banks. They obviously take a different management decision. But it''s been -- our management and our Board is behind the strategy of retaining earnings until such time as we feel confident that we can meet our goal of a capital range of 45 billion francs to 50 billion francs.

Unidentified Analyst

Okay. Thank you very much.

John Cryan

Are there any more questions?

Operator

The last question for today is from Mr. Robert Murphy, HSBC. Please go ahead.

Robert Murphy – HSBC

Yes. Good morning. I just wanted to come back to the deferred tax asset. You''re using a five-year horizon. Legally in the U.S. you can use earnings for 20 years. So if I apply your methodology each year, shouldn''t we get an extra year release per annum of something like 1 billion francs back into either income or equity from U.S. tax asset reserves?

John Cryan

That''s -- you''re correct about the 20 years. So on average there''s probably something like 18 years left because the tax losses in particular were incurred in 2008. And you''re right, as we move forward we get different vintages. We lose the current year and we gain one in five years'' time. Your logic works if everything applies as we expect it to apply and everything''s on track. It also applies only if the fifth year that comes in is equal to the one year, the current year that pulls out.

But at the moment we only provide our Board with a five-year business plan and it''s, as I said earlier, it''s difficult to plan what''s going to happen next week, particularly in the Investment Bank. So five years is a little bit of a thinker in the air, but we do it for all sorts of reasons. I think you have to do it as a bank anyway. And we do use it as one of the guides to determining what we provide as both on balance sheet defe