Following is the transcript of CNBC's exclusive interview with Tidjane Thiam, Group CEO of Credit Suisse at the Credit Suisse Asian Investment Conference in Hong Kong. The interview was broadcast on Squawk Box on 19 March 2018.
All references must be sourced to a "CNBC Interview'.
Interviewed by CNBC's Bernie Lo and Akiko Fujita.
Bernie Lo (BL): Thanks for having us and taking the time to join us. You know the old saying goes two heads are better than one, three years are better than two when it comes to turning around the fortunes at CS. The first two years were not easy but it looks like 2018 is already really bearing fruit. Just going by some of the tone in the media, its changed quite dramatically from where we were in 2015-2016.
Tidjane Thiam: Thank you Bernie for acknowledging that. I'm very, very pleased for all the teams. It's a great pleasure to be here it's our 21st conference. The kid is almost graduated from college now. 21 years is a long time and the program is working well. Look, we came in in 2015, we defined a new strategy. We did 2016, 2017 and 2018 is the third year. So you would expect us to be two thirds of the way. We've done 75 percent of the cost cuts by the end of 2017. And we've done 85 percent of our profit so we're way ahead of the two thirds where you would expect us to be. And as you said that's starting to be reflected in the major commentary and sentiment and share price and price to book et cetera. So it's pleasing, people have worked very hard. As you said 2016 was difficult, 78,000 people around the world in a completely new structure - all of that had to bed down. In 2017 you've seen the power of that coming through. Thirty seven billion of net new asset versus 18, two years ago, more than doubled in two years. And here in Asia, performance has been really extraordinary reflecting the growth in the region.
Akiko Fujita (AF): I want to get into more of the specifics of the business for Credit Suisse in just a bit but I wonder if we can pull back a little to talk about the macro environment. The last time we saw each other was over in Davos, an incredible amount of optimism, almost uncomfortably so, talking about the synchronized global growth that we're seeing. Since then we did in fact see a correction in the markets over in February, almost a sell off on the back of rising rates. Is there a sense here that perhaps maybe investors got a bit too caught up in the exuberance of the calm relative low volatility conditions that we saw and perhaps overlooked some of the risks that were coming?
Tidjane Thiam: Yes it's a perfect description you made of what happened. Markets always struggle to change from one state to another. And what you saw in January is the exit of a very long period of low volatility with continually rising asset values and low interest rates. So you had two of those three changing relatively abruptly, interest rate expectations and volatility, and that unsettled markets and you saw that playing through in February. But stepping back from a short term, the long term outlook remains very positive for us, very constructive. Global growth is at historic highs. Remember in 2015 when I started the push in Asia and we invested heavily, everybody thought we were crazy because people started doubting China. Well I've never doubted China. All my career I've bet on China and that has been absolutely successful, whether I was in Africa in government or private sector leading companies. So in that context China is doing really well, that's driving Asia. You have Europe with France turning around and Macron coming in with new policies, a much better sentiment in Europe. France revised its 2017 GDP growth figure - I can't remember the last time that happened, revised it upwards. And then you have the U.S. still going strong with massive tax cuts. I've never seen a tax cut followed by a recession. It's a massive tax cut and that is going to have a positive impact. Now we have other issues, the negatives on trade issues that we know. Our central scenario on that is you may have trade skirmishes but we don't see yet a trade war happening. So we're relatively, always cautious, but optimistic.
BL: What's the thing that worries you most right now? Because 2018 did not start off as we had planned. We got through Christmas holidays. By the time you got to Davos it was a completely different environment. You had to come up with a whole new set of talking points. Is it inflation? Is it trade? Is it the politics of the time or are they inextricably linked and impossible to separate right now? I have seen for 10 years the inflation hawks disappear. I didn't see them, I didn't talk to them, I didn't call them, and they didn't call me back. And then all of a sudden they are exploding and they're all over the place like mushrooms after a spring rain.
Tidjane Thiam: Well I would never dare to describe things as vividly as you do. I recognize the picture if I can say that. Look, I believe very much in productivity, productivity of factors. The flip side of innovation is continuous growth in productivity of factors in the economy and that has been the biggest dampener of inflation ever invented. We saw it with China from the 90s and early 2000s contributing to keeping wage pressures down and that ability to innovate ultimately is the answer. Yes there were always fears of short term bouts of inflation, whether its commodity driven or by supply and demand bottlenecks here and there. But I think the long term trends; I think central banks have really become so focused on inflation. So focused on inflation and we've learned so much from the 70s et cetera. But there is very little risk that inflation gets out of control. Coming out of this long period of low inflation I think a little bit of inflation actually would be good news. Certainly the European central bank is desperate to see some inflation in the European economy. So no, I don't see a big increase, and if would take a catastrophic scenario on trade for protectionism to really raise to a level where it generates again significant inflation in the economy. So I think nicely raising interest rates, long term interest rates, is our central scenario, which I think has benefits for everybody in the world economy.
AF: Let me ask you about trade. You've raised that issue a few times. It doesn't sound like you're too concerned about the potential for a trade war. But it does seem like at least hearing the dialogue back and forth coming out of the last few weeks that we're starting to see a bit of a tit-for-tat that could erupt between the U.S. and China. We heard from the trade advisor Pete Navarro last week saying that this can be resolved in a peaceful way and for countries who are targeted; there is no incentive for them to retaliate. Do you agree with that?
Tidjane Thiam: Well, I would say I'm not going to comment on specific statements but I think that it's - the world is quite rational and it's in everybody's interest to avoid a major trade war. So I'm still confident that all mechanisms we have in place of dialogue will lead to a right outcome.
Now statements as you know are part of any negotiations so they can be more or less aggressive but I still believe fundamentally the world economy is on the right path.
AF: Welcome back to Squawk Box. We are live here at the 21st Annual Asia Investment Conference hosted of course by Credit Suisse and we are back with the Group CEO, Tidjane Thiam, for another few minutes. Before we went to the break we were talking about the growth we have seen here in Asia. Over at Credit Suisse revenue is up 15 percent over the last few months of the year. Let me get your sense on what you've heard coming out of China over the last few weeks in terms of the transition that's happening in the financial markets there. We're talking about 6.5 percent growth now.
It's certainly lower but there is a sense that China is trying to get a better handle on the debt issue. What is your sense in terms of how China's managing the broader slow down?
Tidjane Thiam: We've been very positive on China. We have a very simple strategy. Look if you're in America in 1850 or 1860, our strategy is to be John D. Rockefeller's bank. And we manage his wealth and we help him build Standard Oil. And actually the third thing I've added now is we'll help him set up foundation and monitor it and do good with it. So that's what we're doing. We're serving the ultra-high net worth, the entrepreneurs of the world and that has worked really beyond our wildest hopes. 200 something million of profits in '16, 800 in '17. It's just been an explosion of profit and business and we continue to do but we use our investment banking skills to cover the entirety of our need.
And in China, China has been a great success for us. We're very focused on greater China. We have a new CEO now for Greater China and we serve a broad range of investors and they give us a good sense of the economy because they're really sitting across sectors and they're all positive, all bullish, they are comforted by a political evolution and really investing across the world. So nothing to worry about there.
BL: What do you make of the consolidation of power that has happened over the past couple of weeks in China? Is this a good thing in the context of the PRC that allows them to avoid extraneous noises and get to the task at hand. Does it have any negative implications because on the outside there's a lot of agitating about what this could mean, about brewing bilateral trade war coming possibly between the U.S. and China? It just seems like a lot of frustrations are now coming to a boil at least in the political sphere.
Tidjane Thiam: You know we remain positive on China. We think that the fundamentals of the economy, the drivers of growth, the urbanization, the emergence of a middle class. It's very complicated to talk about the debt problem in China. Take for example the fact that ownership of land is still in transition. That's an enormous reserve of wealth. In fact if you look at the national accounts of the country today it is not taken into account. So you just have to be careful when you interpret some of the statistics. We're comfortable with the level of indebtedness; we're comfortable with the upside. We think it's going to continue to work. We like to see the Chinese economy more integrated into a global economy with inflows and outflows of capital. And really as far as politics just as I would never comment on the politics of the United States I will never comment for the politics of China. It's the respect we owe to every nation not to get involved as businesspeople in domestic politics.
But all I can say is that the track record of delivery of the Chinese leadership is second to none. I may have told you but I went to China the first time in 1984 and I spent two months in China in 1984 and I've been going every year since then. For anybody who's been to China in 1984 you can only be a China bull.
AF: Let's talk more about the business at Credit Suisse as Bernie alluded to earlier you're now in the last leg of a three year transformation that you have set out. It certainly seems like you're heading the right direction. And yet when you look at the numbers last year, third straight year of losses so where do you think investors should look to, to be confident that this turnaround story is in fact working?
Tidjane Thiam: Come on, third year of losses. You know why we had the loss this year. First of all we have set up a non-core unit, 77 billion of RWA. That was more two years ago when it was the size of a Swiss bank. And we've been cleaning up a lot of undesirable trades that we should not have done and that has cost us 3 billion of losses in 2016, 1.9 billion in 2017. Without that 1.9 billion of cleaning the legacy we were profitable. We've solved 1.9 billion of cleaning the legacy, 2.3 billion of DTA write-off, that's 4.2 billion and we had a 900 million loss. Anybody can do that math. If you take 4.2 billion you only lose 900 million. I know it's a very sexy headline "third straight year of loss," but we addressed it and the operational profit is excellent. Profit keeps going up. We finished winding down that restructuring unit this year and we've announced already a 1.4 billion loss. After that the company will be very profitable. We've said 10 to 11 percent is our return on tangible equity in 2019 and the whole market believes that. So there is no way to clean up the past given the legacy we had without generating losses. Not to be confused with the profitable operation of a company. Cleaning up the past generates losses but the company operating very profitable.
AF: Let me ask you this though because in many ways you've had to play the clean-up role, has that transition been more challenging than you initially anticipated when you set out the three year road map?
Tidjane Thiam: It's irrelevant how I feel, isn't it? I'm joking but look, the good thing is that it's going really well. I started, we had 54 billion of RWA, risk weighted assets we did not want. It's down to 14 billion. So everybody breathes more easily, everybody sleeps at night. The rest of the bank is super healthy, growing, and profitable. The problem we had was we needed to get rid of a huge legacy. For that we needed to raise capital, which we've done, fixed the balance sheet, getting all those undesirable assets out. And the remaining bank is fantastic, whether it's in Switzerland, in Asia, in the rest of the world, we are growing faster than all our peers and generating fantastic performance.
BL: Of the challenges that you are faced with throughout the last couple of years, you know whether it was the capital base- getting your capital base up to where you wanted in terms of fund raising making those decisions, the compensation issue, which was widely telegraphed, and there was the case of a very small minority shareholder, I think they had less than 0.5 percent agitating for the breakup of the company. What did you learn from all that? Are these issues buried and done or will they crop up again?
Tidjane Thiam: I would never say something like this is buried and done. People have an ability to come up with new issues which we didn't see. But look we had a very good plan. We thought very, very hard before designing it. There is not a single commenter issue that we hadn't thought about, analyzed. You've probably seen me through that period. We've just stayed the course. We knew what we were doing. I've said this about AIA, you know AIA is now worth 96 billion. I was pilloried for buying it for 35 billion. It's worth 96. I've always said in my country we say that lies run fast, but the truth always catches up with them in the end. So slowly, slowly, steady, steady, we knew what we were doing and progressively the results are coming out. You cannot do such a restructuring without triggering noise. My pride is really the trust of the clients, if they stay with us for that period. In spite of that noise you haven't seen huge outflows at Credit Suisse. And the staff, the staff has worked so hard and accepted all kinds of sacrifices and the reason I'm so pleased today that things are better is really our staff.
AF: Let me ask you very quickly. I know we don't have a lot of time but Credit Suisse is facing a class action lawsuit right now as it relates to these velocity shares, XIV, investors saying that essentially Credit Suisse did not disclose the inherent risk that are involved. Now I know what the bank's stance is essentially that it was laid out but in hindsight these are products that were marketed towards…
Tidjane Thiam: I can save you some time. The lawsuit is that we didn't publish the price during the day, because it does not publish the price, S&P does. So people will sue us for something we're not in charge of. It's hard to understand. And regarding the indicative values that's by Janus not by us. So it's hard to understand but it is what it is.
AF: Let me ask you the issue of ETNs though. Do you think that regulators should step in more to monitor the issuance of these ETNs given what we have seen now? A lot of these retail investors are jumping in without really knowing exactly the value of what is sold.
Tidjane Thiam: Well that is a question for regulators. As a company we think we've been hyper clear about what the spreads are, what the risks are. Really it's a matter for regulators whether they need to stop retail investors from investing in those.