JC: So, huge clean-up operation going on this quarter, some of which you shouldn't have had to do?
TT: I accept the word clean up, I've been saying it's a clean-up and a turnaround, so there is the need to deal with a number of legacy issues, something like the good will from the 2,000 year [inaudible] acquisition, you just need to recognise that and take it out, there is a lot of restructuring charges attached to what we are doing, it's a big clear up but it's necessary , we need to clear it up to move forward . If you remember we defined five divisions, three of those divisions have profit targets, and if you look at them they are making good progress, which really I didn't expect this early in announcing the strategy, Asia has done really well, 17.8 billion of [inaudible], including three in the fourth quarter, so in spite of all of the fears, we have not seen a disturbance in Asia, profits are increasing by more than 20% and the star performer is actually Switzerland, you've heard me talk a lot about Switzerland when you focus on Switzerland, profits are up 25% quarter on quarter, the international division has also done well, our investment bankers, capital market activity has had actually a good quarter in terms of deals announced, but there's always a lag in that business even when you [inaudible], it's very promising for 2016, we've had our best fourth quarter in 5 years, the challenge is in global markets which is our equities and fixing [inaudible] business, we've worked with [inaudible] in the fourth quarter, the fixing [inaudible] activity has suffered, we're taking a number of marks on our portfolio and there are specific activities from which we are withdrawing following the strategy that we've been taking down the inventory, that we were cut in December when spreads increased, having not finished with cleaning up and showing losses, so in the end global markets has [inaudible] in this quarter.
JC: I'll come back to that division specifically but, UBS obviously saw huge outflows in the fourth quarter, stark contrast to you, but they said, look, we're not going to pay up here for unprofitable business, so are you paying up for unprofitable business in order to get those assets?
TT: No… business is very profitable. Extremely profitable. If you see the returns in Asia, the return on capital is 25/26% so that's not what you generate when you're paying for assets. So it's really a tribute to the quality of our sales force. We said we would increase our sales force from about 520 to 800 in 2018. We've recruited 70 this year, 50 the year before, 70 this year, 40 in the last quarter so, people are actually coming to us. The fact that we've been so on the front foot saying: look, we believe in the emerging markets, we believe in Asia, forget the volatility, we have capital, we have [inaudible] in Asia. It's very attractive for teams on the field… so teams are actually knocking on our door.
JC: And clients are willing to forget the volatility?
TT: It's different. Most of them are, a lot of them are billionaires, a lot of them became billionaires by being shrewd investors and what we find with them is they tend to look at periods like this, like periods of [inaudible] volatility. They have means to withstand volatility, they are looking opportunities so they come to us saying: give us ideas. A lot of things are mispriced – I think that's obvious every day – and mispricing by definition creates opportunities.
So, what you see is what [inaudible] lower end there is a drop in activity. And I think that will come from my outlook for Q1 is relatively cautious and prudent. There will be a knock on the level of activity and trading but in terms of collecting the assets and getting people to come in. We are not yet finding that difficult.
JC: So in terms of doubling your profits in the Asia region by 2018, still think that's an achievable target?
TT: Absolutely. We have 36 months and we have just finished one. So we're not about to drop the target in the end of month of 36.
JC: What about the future IPO of the Asia business? A lot of analysts out there saying actually this is something you should think about as well.
TT: No. We are very happy with the business and I have no plans to IPO it for the time being. We have announced one projected IPO which is right of the Swiss business because we really think it's undervalued and we think that [inaudible] you've seen the results of 25% YOY in profit and we believe that as we deliver what we've said in Switzerland, the valuation of Switzerland will improve and the IPO will put a very good price on that asset.
JC: One final question on your clients: one of your competitors, UBS, is saying look: either invest your cash or push off. Because it is tough to keep cash on the balance sheet. Are you saying the same thing to big clients that are not willing to invest?
TT: We haven't seen a change in the cash balances, I mean I've looked over the last seven or eight years and they're stable…
JC: But are you being tough with them and saying guys, invest, or take your money away?
TT: We are always in a very intense dialogue with our customers, often I sit down in those meetings. What we really do is we help them manage their lives and that's a much bigger conversation than just invest in this, invest in that. We often have 7, 8, 9, 10 people in the same family, I do family dinners, we have 20, 30, 3-4 generations, a lot of our clients have been clients for generations, [inaudible], I get really good stories, I walked into a brunch in Saint-Maurice, in whatever 6 years ago and here we are so the nature of the relationship is real, we look at all their assets and abilities, help them plan their inheritance and things like that so it is a bigger relationship than one quarter based on market volatility.
JC: So you are better in talking them into products?
TT: I don't think so, I think we are really focused on their own long-term interest and that of their families but by doing that we are also promoting our own self-interest.
JC: Let's talk about the investment banking division of global markets because you said earlier this was an incredible challenging quarter, you have obviously shifted away from the likes of the rates business into what actually what struggled most into the 4th quarter, be it credit, be it mortgages, still the right plan?
TT: Still the right decision. Macro is a very destructive business for us, we have absolutely no regrets, the fact is that in some circumstances it does relatively well, it doesn't mean that across the cycle it doesn't destroy [inaudible] so we are absolutely adamant that for us macro has been a bad business across the cycle so we are very happy to have shrunk there. In the other businesses, it is a question of changing the business model and maybe we haven't talked about that enough in the past. First of all we believe it is important to be in investment banking, second we think it is important to be both in equities and fixed income because the economy moves in different ways and different phases but now what you have to do is [inaudible] the fixed income and there are activities like the distressed debt trading in fixed income or what we do in [inaudible] but we don't fit in the new strategy and now we are tackling cutting them down.
JC: Are you talking to Wells Fargo about off-setting some of this investment banking?
JC: No conversation being held?
TT: No, I have never even met Mr Stumpf .
JC: So it is all rumour and speculation?
TT: I dropped a long time ago the expectations of controlling rumours, it is just something I cannot worry about.
JC: But you would like to if you were interested?
JC: Just a quick message to him..if he is interested
TT: No no, I don't speculate… No we did a very good transaction on our US private bank and [inaudible] people who create those rumours and trade on them are very smart. That is how they make their money. It was…for a rumour to be credible, it has to be an element of truth, yes we did a transaction with [inaudible] so if you put in the market that we are going to do [inaudible] investment bank, a lot of people will believe it, I have no control over that.
JC: Just quantify for me the bank's exposure to the energy market because there is a lot of fear around about the credit exposure, the energy-related exposure…
TT: In short, I'll say it is manageable, of course you can imagine the bulk of our scale involved in the US economy, we have a big investment bank in the US economy so we have played a role in the development of the shale gas sector, the total exposure is about 11 billion but 20% of it is unfunded and we think that the quality of the collateral etc. means that is reasonable and these losses in the 4th quarter, it played a role but not a major one.
JC: So it is manageable?
TT: It is manageable
JC: Obviously you've set your 2018 targets, we've talk a bit about the Asia business. But overall your pre-tax profits for the group – a number of analysts out there are saying look, you're going to fall in 20% below that at this rate. They're saying actually those targets are not achievable.
TT: It's not the first time in my career that analysts, sell-side, disagree with me.
JC: So you're going to prove them wrong?
TT: I'm just noting the fact. We're working very hard to deliver what we committed to delivering. I think it's completely achievable… All I can say is it's achievable. And we are well on track; these results show it.
JC: How do you convince investors of that? Because look at the share price…
TT: The share price doesn't mean that investors are not convinced. Please, you know what's going on in the world. I didn't create the sharp decline in the oil prices; right now there is a complete disconnect between share prices and value. I ran another company, financial, I've seen the share price at 1.95, I've seen it at 17…. It's gyrations. There's a point where there's a real disconnect between increasing value and share price, so I really would argue very strongly. I was talking to one of my major investors yesterday that this share price does not reflect the fact that investors do not believe in this strategy. I know it's written up like that – it's convenient. You can always take two things that happen that are synchronous and say that there's a causality there but there's no causality.
JC: What breaks this disconnect? What's going on in the market?
TT: Time, Chinese results and a bit of… They tend to focus on the downside, they tend to focus on extreme scenarios and there's still a lot of lugging …[inaudiable]… effect from 08/09 – people remember that, had been burned badly. So they build catastrophe scenarios that which we don't think are likely.
JC: Look at the broader European banking sector. Look at the U.S. banking sector – they're pricing in a global recession.
TT: I think it's good time to buy banks.
JC: Is it?
TT: Yes. Because really, the world would have to come to an end. First of all, because of [inaudible] systemically important banks will have raised four trillion dollars of capital, of additional capital. We're completely in a different place. There is no scenario where the banking sector blows up today. We've been moaning and complaining about how much capital we all have to carry but the flip side of that is that the system is safe. So the doomsday scenarios are not justified. There is an over-emphasis on the oil sector. The two theories of what's going out there – it's either a demand problem or a supply problem. We as a house think it's completely a supply problem that's driving the oil price down.
People are scaring themselves about China. The slowdown in China is by design -- the purpose, the objective, the strategy being implemented by the Chinese government, you can read their papers. They say this everywhere. It's to move from an investment-led, export-led model to a consumption-led model – which is what the United States of America did in the 19th/20th century -- but that slows down your growth.
JC: But people are concerned about a broader depreciation of the currency and the spill over effects to Asia. You think it's a complete overreaction?
TT: Of course these are real worries, but I think there's an over-statement of those worries. It's difficult to manage because China is managing a difficult transition, but the consumer is reacting well. The oil price decrease is very good for the U.S. consumer; it's very good for the European consumer – the PMI and consumer surveys in Europe are at historic highs and that's thanks to the oil price. So all that is going to have a positive feedback loop in the economy over time. But the markets have gotten, I think, extremely jittery we could give examples every day of shares suspended, for really very spurious information…
JC: You said time, time solves this. How much time?
TT: I'm not going to make a call on that.
JC: One quarter, two quarters?
TT: I think it's a few quarters.
JC: Do you? So it's going to be a really tough 2016?
TT: Yeah, the outlook for 2016 is relatively tough. But for us, we've defined our long term strategy. We believe in it, we believe in emerging markets, we believe in Switzerland. And we're just going to keep executing. We have accelerated… Our reaction to this has been an acceleration of the cost-saving programme. We have now actioned 1.2 billion of cost savings at the end of January – we had a 3.5 billion target, so we've already done one third of the 2018 target by January 16, so we're moving at pace.
JC: Final quick question. You said the share price doesn't reflect fundamentals or your plans for the bank. But what about your employees? They're looking at the share price, probably with their head in their hands and morale is low.
TT: No they're not.
JC: Morale is not low?
TT: Morale is not low.
TT: Morale is not low.
JC: I hear morale is low.
TT: Well morale is not low. You think morale is low in Asia with profits up 25%?
JC: What about Europe where you're stripping back and you're cutting jobs?
TT: You're closing in on unprofitable businesses. Of course, you live in London – in London I'm sure morale is not great, but London has a real cost challenge. We have put in London activities which should not be in London , it's my duty to the shareholders to fix that. The world doesn't limit itself to London. Morale is not low everywhere. Moral is very strong in Switzerland, they've had a stonking quarter, up 25% in Switzerland. A market that we're told has no growth. 13.8 billion of net new assets, 18 billion in Asia and in America …[inaudible]… We've been designated equities house of the year; leveraged finance house of the year. We're number 1 in leveraged finance, we're number 3 in equity, we're now number 5 in M&A behind, kind of, Goldman, Morgan Stanley. So, I am biased, but I don't think morale is low. I think people are determined to deliver what they committed to.