Wealth Management in the Americas reversed its prior quarter losses with a modest profit contribution and Global Asset Management ended in improved results. Wealth Management and Swiss Bank reported disappointing numbers.
Our net flows of client assets remain a concern and will do so for some time to come. Notwithstanding outflows from all of our Wealth and Asset Management Divisions, the balance of invested assets remained stable, largely as a result of good investment performance.
We continued to strengthen our balance sheet. We cut legacy risk wherever healthy markets enabled us to do so. From June to September, we brought the overall balance sheet down by 8% and risk assets down by 15%. And we ended the quarter with a 15% tier 1 ratio.
This, by now familiar, slide details the performance of our divisions showing their reported and adjusted results. We recorded gross revenues before own credit and CLE of almost 7.5 billion francs.
In Wealth Management and Swiss Bank, both revenues from client transactions and recurrent fees came under pressure. However, in the Investment Bank, we saw revenues recover strongly, mainly because of the absence of significant write–downs and losses on the risk positions in FICC.
Credit loss expense fell again quarter-on-quarter. In Wealth Management and Swiss Bank, we continued to benefit from the release of allowances taken last year against collateral from defaulted Lombard loans.
The overall credit situation in Switzerland remains robust, given the general economic environment. In the Investment Bank, 63 million francs of the net CLE of 243 million was incurred on former trading positions reclassified to loans and receivables in Q4 last year.
Now, as you know, we report changes in the overall fair value of certain of our financial liabilities as economic own credit. The continued tightening of our senior debt spreads led to a net increase in the fair value of these liabilities in the quarter.
As I forecasted in my presentation of the second quarter results, this resulted in a charge to income for the period of over 1.4 billion francs. And, given the current level of our credit spreads, I would not be surprised if there were another charge, another sizeable charge for our own credit in our fourth quarter results.
Overall, expenses were just under 6.4 billion francs. I’ll cover them in more detail in a moment.
The bottom half of the slide shows the adjusted pre–tax profit for the quarter for each of our divisions. We add back charges we incurred on three items, own credit, the closeout of the currency translation account in OCI through the P&L when we completed on the sale of Pactual and marking-to-market the embedded options in the MCN before it converted to equity in August.
Adjusting for these items, the firm made an underlying profit before tax of just under 1.6 billion francs. Losses incurred from own credit effects are largely tax deductible, but otherwise did not impact our regulatory capital, nor is there a regulatory capital impact from the true up of the replacement value of the MCNs prior to conversion. And because the Pactual CTA balance had accumulated in equity over the period since we bought the business, back in December 2006, its release also had no impact on our regulatory capital.
This slide shows the quarter-on-quarter change in our revenues by business activity. The more stable sources of revenue, fee and commission income and interest margin, slipped slightly to a total of 5.7 billion francs. Commission income was up marginally, M&A and other corporate advisory fees were marginally weaker.
Net brokerage fees were down 7% as our cash equities business coped with staff dislocation from the first half of the year in the context of a seasonally weak quarter. Underwriting fees were flat, with ECM picking up the slack from a weak quarter for debt capital markets.
Portfolio management and advisory fees were strong, up 5% overall, driven by a pickup in Wealth Management Americas and higher performance fees in A&Q.
Interest margins came under pressure in the Swiss Bank and in the deposit books in the Wealth Management businesses. The yield pickup from extending deposit maturities in our portfolios of replication and fixed receiver swaps has diminished significantly.
This is especially marked in Swiss francs where the curve is essentially flat out to the two year tenor. We’ve responded by lengthening the replication books a degree, but we do not expect to see a material improvement in interest margins in the next few quarters.
A more encouraging development was in the net income from our trading businesses, which made a positive revenue contribution after own credit effects for the first time since the second quarter of 2007. This was largely because of the significant reduction in write–downs and losses from the FICC trading books.
Despite the significant reduction in non-personnel expenses in the quarter, overall Group operating expenses grew for the second quarter in a row. Adjusting Q2 for goodwill and restructuring charges, operating expenses grew by 6%, reflecting an increase in underlying personnel expenses of 420 million francs.
More than all of the increase in personnel costs resulted from an increase in the rate of accrual for performance related compensation, by around 65% quarter-on-quarter. About half of this increased accrual rate was attributable to our decision to raise the threshold for deferring compensation where this included a catch-up effect for the year-to-date. And the division most impacted was Wealth Management and Swiss Bank.
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