Deutsche Bank AG (DB) 2002 Q3 法說會逐字稿

Thank you ladies and gentlemen, and welcome to today's Deutsche Bank call. I would like to hand it over to in Wolfram Schmitt and I'll be standing by for questions.

Yes. Thank you, good afternoon respective, good morning to all of you. Every quarter is leading to result, and therefore we welcome you to Deutsche Bank's third quarter results. For those -- for this I assume that you have studied our release, which we distributed approximately 6 hours ago. Also you had access to the entire interim report on the first nine months and important enough last but not least, you have been able to download the supporting slides to which reference will be made throughout this call. For this, I hand over to our host today, our CFO, Clement Borsig, who will take you through this presentation. Clement?

Thank you, good afternoon, good morning also to all of you over from my side. Before I discuss the quarterly result in some detail, please permit me to make some introductory comments here.

As anticipated, the third quarter was very challenging us to. We had difficult market conditions with lower customer flow, [ Indiscernible ] Uncertainty as to the development of the global economy and in the political environment created a difficult business environment. Again, this quarter, our bank -- [ Indiscernible ] has earned an acceptable result. Clearly, we are not satisfied with these results and we're taking steps to improve our performance, performance and strength in our bank. As you will see, we are fully delivering on our cost reduction initiatives, we have made substantial progress in exiting non-call businesses, we have reduced risks and we will continue to do so in a way that will hep us improve profitability, and we're fully committed to our strong capital base and managing our stock buyback program so that we can maintain our regulatory capital ratios in excess of requirements. This morning, Fitch [ph] announced they were maintaining our AA credit rating. We're very pleased with this recognition of the strength of our franchise. So far, my introductory remarks, and now let me begin my discussion of the third quarter, of the third quarter results.

First, um, first revenues, I talked about a difficult market condition, so revenues were impacted, they were down 11%, underlying revenues were down 11% compared with the same quarter the year before; however, I have to mention here that for us, third quarter last year was a relatively good quarter, and I will discuss this in a little more detail when I discuss our sales and training performance in CIB. Cost management clearly continues to show results, our operating cost base is down, um, by 8% year on year to 4.7 billion. And those cost reductions was particularly, um, evident in the third quarter by a further reduction of our noncomp operational expenses. As to our compensation expenses, I have to mention here a special effect which we haven't taken out, and that is the impact of a hedge on our stock's compensation and, um, as a result, um, as a result of the drop in the stock market, um, of our -- of our stock in the market. We had the negative mark-to-market, which needed to -- which had to be accounted for under compensation. It was over, um, over 100 million, so adjusting for this affects our compensation rate, which has come down. As we will see later, um, our head count development, we further reduced our head count but as you will know that there's a time lag between when people leave the door and when the impact can be recognized in the P&L.

As to our -- as to our pretax profit, our performance number was a pretax loss of 180 million, and we had three special effects here at work. Let me discuss first, um, let me discuss those special effects. First, we had the positive effect of around 400 million primarily from our setting up of the joint venture [ Indiscernible ] by us transferring our own [indiscernible] hyperactivities. The number here was 390 and, um, some were higher as some of you might have thought. The reason for this is -- but if you are interested I can discuss it in more detail later on. The reason for this is the guarantee, which we had to provide to this new joint venture was -- had to be accounted for after tax and, therefore, the tax effect had to be taken out of the guarantee and that has the effect of us recognizing a higher gain on this -- on this transaction. We had severance payments, severance payments of .1 billion. We had net lie downs [ph] [indiscernible] and a lot on investments. This, again is, um, primarily, or this again relates primarily to Guerling [ph].

As I explained in the last quarter, we not only do an equity pickup as to Guerling but we also use the Guerling account against our accounting standards and this calls for another value adjustment of 160 million. We then had an effect we changed the measurement of our upper year [indiscernible] allowances or our value adjustment of our loan foreclosure, and I'll discuss this effect when we come to credit risk. The special effect added up to .3 billion, giving up the net underlying profit of .1 billion.

As you can see from chart number 8, our underlying revenues declined year in the third quarter, declined year on year by 11%. We will not, um, able to fully compensate this decline, um, by a reduction of operating cost space, but we managed a reduction as mentioned before, by 8%, and, um, if you wanted to [indiscernible] this here, the MTM charge or debit I talked about before, you know, this gives you something, another 1 to 2 percentage point. So, our underlying pre tax profit before total provisions for private losses came down by .2 billion, and then we were hit by total provisions of credit losses, .6 if we exclude the measurement change of the general value adjustment resulting from the measurement, from the measurement change. It's clear that this is not satisfactory to us as before, but at least it shows, you know, we're really working to compensate -- to upset the impact of declining revenue.

As far as the nine months number are concerned here, we were able to overcompensate the decline percentagewise, decline in underlying revenues, 1.9 billion or 9%, and on savings from the operating cost space we gained 1.9 billion or 11% for the underlying pretax profits before total provisions for credit losses remain flat despite lower revenues and this results then in the reduction of the underlying cost income ratio; however, we were hit by this, by much higher total provision for credit losses, so the underlying profits went down by 900 million or 36% to 1.6, to 1.6 billion.

Let me now come do to CIB, um, the revenue performance was clearly impacted by lower operating and origination volume on a year-on year basis, um, we were adversely -- the reduction was 16% and once again, I have to mention here that our, particularly our sales and training performance in the third quarter 2001, as this relates to global markets, was very, very good. They had, um, record September, a record September last year so the decline is also the result of a high, um, of a high base. This quarter in sales and trading of debt and related products, we had a decline in revenues caused by the weakness in the cash market, and that's very important. It was a weakness in the cash market. However, our credit business produced strong results and, in fact, had a record September. Cost management at work as you can see here, are not our -- [ Indiscernible ] base down by 21% year on year, I talked -- what I talked about clearly impacted operating, um, excuse me, impacted compensation expenses if you take this out, um, you have a -- you have a slight decline on the compensation costs. The pretax loss on page 12, the pretax loss is a difficult to difficult margin and higher provisional, particularly higher, um, proficient for credit losses.

Let me now come to PKAM [ph] revenue, revenue performance. You can read the underlying revenue holding up in a difficult market environment. And on the slide 14, you see global banking continues delivering consistent revenues. Cost management delivering the, um, the necessary -- the necessary results and this leads to, um, consistent performance in 2002, um, this underlying profits in excess of 200 million. The third quarter was adversely impacted by higher loan, slightly higher loan margin provisions, but it's clear that the picture in 2002 it's more consistent than the performance of the year -- of the year before, and you also see, um, on that chart respectable return on equity in that business. Bottom line this means that the repositioning and restructuring of PKAM has clearly already shown this out.

Now, let me come to provisions in the third -- in the third quarter. We had total provisions for credit losses without the measure of -- the impact of the measurement change for general organization adjustment of 590 million. Again, an increase compared to the second quarter. If we analyze those provisions, we find that small factors are responsible, um, are responsible for that -- small factors are responsible for that increase in the PKAM side, [indiscernible] or single stock, lumber [ph]. As discussed the last time, the drop in the recovery rate and also, um, credit losses in our approaching [ Indiscernible ]. It's important to mention here, this is a business which engaged in long-term financing, but which we exited in '98, '99, so in a way we're dealing here with a -- , um, with the lack of the problem and then the 200 million in addition, um, with respect to our general livation [ph] assessment. Let me please explain this. Our methodologies so far was based upon the German practice and that was historical methods of the average. We use the historical average of the 5 proceeding years and we move now to a forward looking, to a forward-looking method based upon expected losses, um, and this is -- gives a much more accurate, a much more accurate pickup as far as the quality of our credit is concerned, and the effect was, um, was a 200 million, 200 million [indiscernible]. We considered it as necessary and appropriate to take this charge in the -- to take this charge in the quarter as the 200 million is an actual related effect, be treated as a special item.

On the following chart, you can see problem loans have declined, but I have to mention here this was helped by the deconsolidation of Hugo Hypo [ph] and also higher [indiscernible] up so in line with the [indiscernible] credit environment, if you take-- [ Indiscernible ] To effect, we, our problem loan would have, um, increased as expected -- as expected. Important here the total loans have come down, and if you take the period from, um, the 18-month period, you see that our total loans have come down by 103 billion or 35%. Clearly, the production was supported, um, by the deconsolidation of -- [ Indiscernible]. Last year, also the deconsolidation of Herhold [ph] in the second quarter this year helps a bit, and in the third quarter now, the deconsolidation of Hugo Hypo [ph]. However, I have to stress here this decline also reflects our aforementioned determination to reduce our credit risk exposure.

Let me now completely to, um, an update on our strategic, on our strategic initiatives, um, significant progress have -- has been made. Also, um, also in the third quarter, as to earning focus, our Costa [ Indiscernible ] is ahead of plan. Our year to date savings, year on year, over 1.9 billion of which .8 billion relates to efficiency gains. We have also as the reduction of our workforce, we have also already achieved 70% of that reduction. As a focus on small businesses, um, I can say we're almost done. Capital and balance sheet management, our risk rated assets are down as you will see in a moment. Our [indiscernible] ratio, um, is very tightly managed in the 8 to 9% range, and we also, um, bought back as, um, announced, our shares.

And as far as PKAM is concerned, I showed you the consistent profit performance this year, discover integration, I can report is now on track. And retail banking in Germany is consistently -- [ Indiscernible ] profitability. As to the efficiency gains on 21, you see the 1.9 billion in savings, which I mentioned, um, before, and as you can see, um, the effect our foreclosure measures haven't really started to show, so as we go forward, those will become then, um, then apparent.

Perhaps I take the opportunity at this point and, um, inform you. We discussed in the extra upside last Saturday, um, -- [ Indiscernible ] our strategic initiatives and discussed the way forward. You are fully aware that our objective is -- to reduce of a operating cost base by 4.1 billion, and by the end of 2003 we decided to accelerate this program, and our target is now -- our target is now that the 4.1 billion savings would become fully effective next -- would become fully effective next year. Let me also repeat that the 4.1 billion in cost savings do not relate to the bonus or our exbonus.

The following chart gives you some detail as far as the work, cost reduction is concerned, and mentioned already that almost 70% of that reduction, [indiscernible] people have been realized. The following chart gives you then the update, on the disposal of -- [ Indiscernible ] business and you can see that we are, um, that we have achieved here substantial progress. Once again, just the disposition of those activities will improve our bottom line, um, as they do have, the income ratio or more than 100%. The cost base will benefit by 1.4 billion. The risk rate is up by 10 billion, and our head count will come down a further 80 billion, so up -- 88,000, excuse me. So, after the implementation of those programs, our head count will be around 70,000 compared with 95,000, um at peak levels. I mentioned with this -- [ Indiscernible ] already, you can see that, again, over an 18-month period, [indiscernible] has come down by 17%. They're now at 268. Clearly the deconsolidation of Hugo Hyper has helped. The deconsolidation of Hugo Hyper was $22 billion; however, it shows our determination to reduce our risk-rated efforts.

The tier one ratio came in at 8.9%. The impact of the stock repurchase program on our, um, regulatory capital was $1.4 billion, so we can say that despite our stock repurchase program, our tier one ratio helped out very, very well. We're fully committed our tier 1 ratio to stay in the upper range of the 8-9% range.

The following gives you a summary, I guess, um, I don't have to discuss those and this concludes my -- my discussion of the third quarter results and I am now happy to answer any questions you may have.

Thank you, if any participants wish to register a question, please press the number one on your telephone. And it's the hash or pound sign to cancel. Once again, if you wish to ask a question at this time, press the number one on your telephone. And it's the hash or pound sign to cancel. There will be brief silence while questions register. Thank you.

Thank you, our first question is from Alexander Schilling. Please go ahead and announcing your company name. [ Indiscernible ]

We cannot hear you.

Hello?

Yes, we cannot hear the question. Sorry.

Hello? Can you hear me?

Please go ahead with your question, sir.

Can you hear me now?

Yeah.

Hi, good afternoon. It's Alexander [ Indiscernible ] in Berlin. Um, I have two questions, please.

The first one is, Dr. Ackerman said he's expecting for [indiscernible] full year results. Please could you give us some more detail on this message, and what the driver, um, is behind this expectation; and the second question is relating to loan-loss provisioning, um, what is your expectation for the fourth quarter or the, um, your target effectively? Thank you.

Yeah, um, these are a little bit difficult questions because they both relate to the -- relate to the future. But, Dr. Ackerman mentioned in his letter to shareholders was the following: We have achieved year-to-date September a pretax profit of 3.3 billion and an underlying profit of 1.6 billion. Compared with last year, we had an underlying profit of 1.8 billion. And, um, what he meant was that the -- even that the 3.3 billion and the 1.6 billion, um, also is a modest, even if the third quarter and the fourth quarter result is more than real result, and in a respectable result once again, given the challenging, the challenging environment. The challenging environment. I clearly, um, -- the sentence was also based upon the result of our quarterly review meetings and, um, um, as we cannot -- as we cannot control the revenues entirely, we cannot control them, we can control our costs and, um, we are highly confident our cost reduction efforts, which we have accelerated as I mentioned before, will also show tangible results in the fourth quarter.

As far as the loan-loss provisions are concerned, I can just say what we outlined on page 25. Based upon our analysis and [ Indiscernible ] we assume that provisions for credit losses have peaked in the third -- in the third, um, quarter. This clearly is absent of a major, of a major disaster which no one, which no one can really, um, forecast. But in under a reasonable scenario, we assumed that credit losses have peaked.

Did I get you right that, um, um, with the flat zeros, we had a fine for you in the fourth quarter. [ Indiscernible ] A black zero in the fourth quarter would be satisfying for you. Did I get that right?

Um, I don't want to be that specific, and I'm not in a position to be that specific at this point in time.

Thank you very much.

Next question.

Thank you, our next question is from Volf Filer. Please go ahead and announce your company name.

Yes. This is Volf Filer from [indiscernible]. I have one question. Do you foresee any substantial risk of the impairment test that you will have to write off of some, um, some -- some -- [ Indiscernible ] of the United States in the year, please?

Again, this is a -- As you know, the process is is that we do have to perform an evaluation of all our goods. That means -- [ Indiscernible ] for all our reporting units. We're very much in the process of doing those. This has to be seen in the context of, um, finalizing in the next couple of months, our strategic, our strategic, um, plans. And once again, it depends on how we see the future profitability, and, um, and our future profitability depends upon how we forecast the revenues, but also, um, how we see the future on no loss provisions and on cost, um, but I guess when we discussed a good -- [ Indiscernible ] the last time, it was on August 1, I made a strong statement, and I made a strong statement as to the goodwill, and um, again, without wanting to do any forward-looking statements, I don't have to add anything to what I said on August 1.

Okay, thank you.

Thank you, our next question and is from Meta Hanson [ph]. Please go ahead and announce your company name.

Yes, I'm from [ Indiscernible ]. I had one question concerning the, um, stock costs, because what I see is in the third quarter, your stock costs have been basically flat versus the second quarter and, um, -- an increase versus the first quarter, why your stock level has been increasing by 11% date to date. This is a little puzzling to me, um, why we don't see much stronger coming down. Could you tell us why, please?

Yeah, this is clearly -- I mean this is clearly something, um, um, which we analyze very, very carefully, and, um, we also want see, you know, this comes as -- as compensation expenses to come down, and to come down quickly. There are, um, there are a few, um, factors, a few factors at work here. At first I talked about the time lapse. You know, people walk out the door, and then when do you see tangibly in the P&L? We also had, um, as you know the effect of consolidation effect of Scarver [ph] and the deconsolidation of Herhold [ph]. It's clearly no secret, you know the average compensation is more of a Scarver [ph] employee is higher than the average compensation of a Herhold [ph] employee. We're clearly impacted by this -- [ Indiscernible ] I mentioned the, um, I mentioned -- [ Indiscernible ] of the mark-to-marketization of our -- of that, but I can tell you, um, the analysis I performed, and this -- and taking the average of the first and second quarter last year, and the second and third quarter this year, and then comparing the average number of employees, you really do see the, um, the head count reduction going through in the P&L. And, um, and I can say I'm very confident, um, that as we go forward, we will see more results in the P&L from the reduction of our head count.

Okay, thank you. Perhaps one other question, the 200 million additional provisioning for, um, loss allowance, and you can said this is an accrual until now. So this means it's not an underlying increase. You will not see this in the fourth quarter or on in the next quarters to come, right?

The 200 -- I mean again, we, um, do a valuation of our general valuation adjustment in German -- [ Indiscernible ] clearly every quarter but the method we have used to follow, or the historical method, as I said, in going forward, it's a forward-looking method. At the 200 million, which we had to record in the third quarter was the effect of us changing from the old method to the new method or the different -- [ Indiscernible ] A different measurement and, therefore, therefore, this is a cumulated effect, and I do not expect a similar charge the following quarter because that would mean that the credit quality, credit quality of the portfolio to come down substantially between September and December and this is -- and we don't foresee this, clearly.

Perhaps one last question concerning loan-loss provisions for 2003. You said that basically you seen the peak in the third quarter but would you see that it will be rather flattish for next year or will you see more reduction in loan-loss provisions if the economic environment stays as it is currently?

I can -- I mean I can, um, you know, once again, these forward-looking questions, I'm not, um, very well positioned to answer. I can only say the following: We have absolutely done the right thing as far as our credit management is concerned. We managed down the portfolio, we refused, um, reduced limits, reduced concentration risks, we -- [ Indiscernible ]. So we have done absolutely the right thing and we have taken the necessary charters, if you will, in our -- in our loan-loss provisions. So -- and this is from a management point of view, this is key. I mean it clearly depends very much upon how we see the global economy developing and the credit -- and the credit environment. Something of major concern then always is, um, you know, how about the German midcap portfolio, and here I can repeat what I said the last time. We have improved the quality of the portfolio, we have reduced our exposure, particularly in the area; um, lower -- of the lower-graded name, the size of the portfolio is manageable, it's right now 38 billion, and our loan, specific loan-loss provisions here on an annualized basis is 55 basic points, um, this year, so when people talk about the Deutsche [indiscernible] crisis, this would not hit us too significantly going forward.

Thank you.

Next question.

Thank you, our next question is from Kiri Rodger. Please go ahead and announce your company name.

Sorry, I don't have a question. Am I on?

Thank you, the question seems to have been withdrawn. The next question is from Fiona Swoppier. Please go ahead, thank you.

I have a number of questions. The first is regarding the slides. If you look on page 30, you talk a lot about your underlying revenues. I wanted to understand what "other" revenues are because if you look at what I call revenue, which is net interest income, trading and commissions, they usually account for most of that, but this quarter, there is about 300 million that is not explained, um, I wondered if you could, um, explain that. The second issue, when you talk about the acceleration of the cost program, you're talking about 4.1 billion, is that just because your divestments are closing earlier or is it because the 2 billion or the run rate I think at the moment annualizes at just over 1 billion is happening by, say the first, second quarter instead; and the third question is when you look at the bonuses, could you -- I mean obviously there is a bigger bonus element in compensation, given you have had relatively weak revenue in Q3, it doesn't seem to have been passed on to bonus Is this -- could you explain what you have been doing on the bonus? Could you -- how have you been passing on the revenue weakness? Thanks.

Yeah, um, let's -- let me start -- let me start with the revenue -- with the revenue reconciliation and, um, are -- these are some fully consolidated companies in -- in the alternative of the portfolio. For example, [indiscernible] and Tele Columbus and stuff like this. And they call -- and they do calls that different, back to further down into the net income from real estate as an element, and, um, insurance is an element, um, if you want to go down further, um, um, the Investor Relations is more than happy to give you all the details, all the details which you need -- which you need here. On the -- okay.

Sure, but the seasonality, is that -- is that usual? And you can see it in 2001 as well in the second half. Is that just something we should always expect that it comes mainly in the second half?

It's always difficult to make prediction as far as the "other" is concerned in the economy. It's an enormous sponge [ph] to stop, um, stop here, um, you know, we head into the second quarter, it was 140, 141 and this quarter is 225. And really that was the chance in order not to hold up this meeting here that you go back to Investor Relations, and they have all the details.

Okay

They have all the details available. On the -- the acceleration comes from -- comes from, um, primarily from our internal measure and as you have seen in that slide, I don't know what the number of the slide reflects. You have seen that in our internal measures, um, on page 21, you can see then the result, as you know, they deliver savings of 2.2 billion, and then we had some portfolio measures, we had an adverse effect of 300 million. This is the common effect. Um, um, you know, now, planning accrual, um, savings of 4.1 billion with our bonus next year, fiscal results of what we have achieved so far, and a further acceleration, further acceleration of our -- of our, um, focus.

As far as the bonus, um, the bonus is concerned, I can only reiterate what I said the last time, our bonus accrual is based upon the performance in each individual, in each individual quarter. You know that the different businesses have different specific bonus, um, accruals and, therefore, um, you know, you cannot directly conclude from the top line revenues to the bonus accrual, it's a little bit more complicated, but I can tell you and also, um, you should -- you should note that the, um, you don't see what our bonus expenses are, but what I talked about is part of the bonus line in the P&L. But our policy clearly is as our bonus accrual is formula based, that revenues declined in specific -- in each business translates into a bonus accrual decline for that particular business.

Okay, thank you.

Next question.

Thank you, our next question is from Jork Penders, please go ahead and announce your company name.

[ Indiscernible ] First, quite small question, how high was the peak, was it 790 million or 590 million? And, um, the another question on the, um, net new money and the asset management area, you have an outflow of 7 million and if I look at the lower figures of intensive management, can I assume there are influences in other areas of management?

Yeah. Um, -- -- the -- on the loan-loss provisions, whatever on the loan-loss provisions people have the following, um, question. But in this regard, I say as far as the specific loan-loss provision is concerned, we assume the 590 is the peak. Um, as far as invested, um, as far as invested as our concern, the decline which you are seeing here is primarily market related. Secondly, a list might be some shift from one category to another, but we do not have seen -- we don't have seen, um, on the new money fund, um, you see a drop in, um, -- in asset management about, clearly I'm not in a position, you know, to break down that 7 billion into the category. Perhaps Wolfram can provide you more details here.

May I ask you, caller -- [ Indiscernible ] Because, um, clearly we saw other developments, statistics in Germany, the WWS enclosed in the first nine months.

Very strong influence.

Very strong influence. That might be a hint but we can break it up probably further.

Okay. Thank you.

Thank you, we have a question from Jeremy Ziggi. Please go ahead, sir.

Yeah.

Hello, -- .

Hello, sir, please go ahead with your question. It appears the question has been withdrawn. The next question is from Stephan Al. Please go ahead announcing your company name.

[ Indiscernible ] My question is, I guess if the peak has been reached in Q3 in loan-loss provisions, is it fair to say that basically 2003 risk provisions should be lower than 2002 risk provisions; and, um, the second question, um, you mentioned that you took an additional accrual of 200 million for provisions to, um, basically for the change, um, in -- in this methodology that you're using now. I guess -- is it -- is 200 million on 260 billion risk-related assets, so about 3/4 of a basis point, um, basically enough for this methodology change from basically taking the historical five-year average to basically having a forward-looking provisioning methodology?

Okay, let me answer your second question first. I will explain to you, um, how -- how does -- how this works. We do have this 200 million that relates to, not to our entire credit exposure, but they relate to our loan portfolio. The difference between total credit exposure and the loan portfolio relates to trading assets, and they're mark-to-markets on a daily basis. So, they're -- so, a loan portfolio is on accrual, and therefore, we have to do provisions. Um, what we do is 192 billion is now our loan portfolio, you deduct the problem loans for which you have specific loan provisions, um, the problem loans are 10.5 billion, so you deduct 10.5, and you apply and then you end up with something like 180, and 181 billion. This portfolio of 181 billion is then, um, classified into 20 -- 26 different credit ratings, um, rates, and with each of those different credit-rating rates, there is an expected loan-loss provision that is a forward-looking loan-loss provision, and then you do the expected loss, the expected default, multiplied by the cover rate gets you then what you expect to use. We do have in general livation allowances, something like short of 800 million, 700 and something, and you have to then, if you make a calculation, you have to relate the 700 and something to the 181 billion. Um, so, that's to this measurement, that's to the measurement change. And once again, this 700 and something million clearly reflects, reflects the expected loss for the portfolio without problem .

Your first question with respect to the loan-loss provision once again, you cannot wait -- your conclusion for my work goes too far. You see we have an -- this year, we had an increase in loan-loss provisions, 384 for the first quarter, 511 in the second quarter, 590 without the [indiscernible]'s in the third quarter, and I then said this now peaks, so, you, -- but, um, it doesn't say -- it's, um, leaves open what our expectations are for the next year, even if you assume that the 590, if you share our assumption that the 590, that the 590, um, the 590 at peak. The reason why I really am not in a position to be more specific on this is we have seen, we have seen, um, during the last say, um 15 months of a continuing deterioration of the credit environment and this makes an outlook for next year, from next year very, very difficult. And once again, I can only repeat that we're absolutely doing the right things in this, um in, this context, and if you'll read, for example, the Fitch [ph] report from today, you will find confirmation of this, that we are doing incredible -- credit management, absolutely the right things by reducing our exposure, hedging our exposure, and tightly managing our exposure.

Maybe a follow up, the 10.5 billion declared at PLs, the coverage of those is, um, if I'm modeling correctly, about 50, 55%? Is that correct?

No, -- yeah. And you think is this enough?

Well, I guess -- I'm not making a judgment at all. I'm trying to get the facts right.

Against this 10.5 billion, you have 4.6 billion in, um, in accumulated loan-loss provisions, but you also have to take into consideration that we do have substantial collateral, and, um, and therefore, one has to combine what we have in loan-loss provisions plus, um, last month, the collateral abroad. [ Indiscernible ] And if we combine those two, they clearly exceed the expected loss on the problem loans.

I understand. With respect to Guerling [ph] , would this be the last of the write-offs for Guerling with the additional, I guess, 160 million that you mentioned?

We have to be be careful with the terminology. We haven't written up our investment, but as it is an equity investment we have applied our livation principles, um, principles to Guerling. As far as our investment is concerned and the value of that investment, I mean we do a review of the answers which we have on their book and the values every quarter, and um, I can only say as of today, um, we feel comfortable, um, as far as our position's concerned, but it is entire, um, insurance industry still, um, is in a difficult, in a difficult, um, situation so I can only say we have done the right things so far, given the uncertainty, I cannot, um, um, rule out that there won't be any additional, additional, um, [indiscernible] adjustment for equity, um, pick up.

If you're interested for the entire -- what we did for the year to date September, you know, we had a debit, if you will, a charge of 530 million of which about 150 million relate to an equity pickup, that is the pickup of their quarterly results and the difference of these livation adjustments. And clearly as these charge go against our -- the value of our investments, I mean now, we feel as up to date, comfortable with the value of that investment.

And I guess with the -- the announcement that they will basically stop underwriting, um, nonlife reinsurance. [Indiscernible] being put essentially in a runoff. Does that make the business somewhat easier to sell in this environment?

That's difficult to comment. But while this stock is clearly -- there is no, at this, that there are no additional capital requirements for the reinsurance business, and, you know, these days the big constraint in the insurance business are the capital requirements.

Yeah. Thank you.

Thank you, our next question is from Jeremy Ziggi, please go ahead and announce your company name.

I'll try again. You can hear me this time?

Yeah.

Excellent. Good, okay, Jeremy Ziggi from [indiscernible] . Two questions if I may. I must come back on the cost point. I must admit, like Fiona, I'm a bit confused on this. If I look at CIB, um, on your own underlying numbers, you have revenues coming down 14% from 2Q to 3Q, and costs coming down 4%. I take your point about cost cuts lagging, but equally they can't burden the costs because there is a restructuring charge to deal with that. So I am very surprised that costs have only come down so little, given that, particularly in that division, so much of it should be variable comp, and one would have expected a much greater reduction in particularly personnel costs there, so I wondered if you could explain to us what is going on. Um, my second question is a shorter one, um, I wonder if you could just comment on the share buyback program, um, given that the wording in your release this morning suggested limited scope for further implementation of the program.

Okay, um. I mean if you take CIB cost management, that is chart 11. The costs have come down. I mean if you take the peak in the fourth quarter from 3.7 billion to 3 billion, um, which is basically -- which is basically, um, 20% and you also have a 21% year on year for the first quarter. What you are questioning is the development then within, um, within the year 2000, and why costs haven't come further down. There are two -- there are two explanations, and that is they reduce by the end of last year and early this year, um, the head count, um, I should say they accomplished almost the entire head count reduction targets, um, early this -- early this year, and, therefore, in the second and third quarter, we have a little bit of a standstill.

Secondly, um, compensation expenses are adversely impacted by this mark-to-market effect which I said before, because equity fund is primarily in the area of CIB. We are now -- we have accelerated now the cost reduction programs and programs and, um, going forward, I'm confident that we will see further, um, further cost reductions. So far on the -- [ Indiscernible ] I can only say from all I know, um, they will continue, they will continue to reduce their costs as we go forward and that was confirmed by the global -- [ Indiscernible ] in our last quarterly review meeting last Monday. As far as the share buyback program is concerned, you know we do have permission by the AGM for 10% of our stock, um, but we always said we want to be flexible as far as making use of that permission is concerned. As of the end of September, roughly 36% of the slightly more than 1/3 of that, um, um, of that volume has been -- has been bought back, and we just want to assure everybody that on one hand we're fully committed to optimize our capital base. On the other hand, that we're absolutely mindful, you know, as far as maintaining a sound and strong capital, capital base is concerned, there is absolutely no indication from our side, m, you know, that we are concerned in any way as to certain limits of our program. Are there further questions?

Thank you, our next question is from David Williams, please go ahead and announce your company name

Hello, David Williams from Morgan Stanley here. Three questions. First, could you actually explain the mechanics of the hedge and how the falling stock price caused you to take a 100 million at charge in the year? Sorry, in the quarter. Second, with regard to gains, to follow up with Jeremy and Fiona's question, on the compensation within CIB, the compensation [indiscernible] went up from 1.6 to 1.7. Now, you said earlier that the impact of the hedge was a hundred-million, which would mean excluding the hedge, the compensation charge within CIB was flat. Now, against the 15% declining revenues, that has to be seen as a disappointing performance, especially with your earlier markets, the majority of the target had already been eliminated within CIB. The third question relates to the bad debt issue and at the start of the year you were guiding the markets toward 1 billion euros. Now that's already exceeded 1.6 billion. So you seem to have been mistaken.

Could you just explain what changed in the, um, really in the bad debt and the credit situation versus your early guidance, because that 1 billion specifically said that even in the recessionary conditions you would not expect that 1 billion to be exceeded. And it clearly has been exceeded and, so, um, going forward, you said you think that the credit charge peaked, um, I just wonder if you [indiscernible] what evidence you have for believing that would be the case. Thank you.

Um, again, on, um, on the -- on the hedge, I mean in -- in simple, you talk about stock appreciation wise, and we hedge our exposure here is basically, it's basically a call and, um, the market value of the call is determined, is clearly determined, you know, by the time value and the level of our -- the level of our stock price and the volatility [indiscernible] credit. So, but the key factor for this was, you know, the top in our stock price which then reduced to extend -- [ Indiscernible ] would then reduce the value of our, um, the value of our that hedge.

I mean on the cost of CIB, I guess I discussed it already. I can only say, um, I can only say, you know, what the factors behind are, and I can only say that going forward we expect this number, this number, um, to come down.

On the loan-loss provisions you said, um, we guided them, we guided the market at 1 billion. I don't know exactly who guided the market by 1 billion, but what I have to say here, what I have to say, um, what I have to say here is -- I mean like most other banks, 2002 turned out to be a very different year of -- and a very difficult year as far as, um, the credit environment, the credit environment is concerned, and those loss provisions clearly, clearly this year exceed expected loss, so if you think about expected loss at this -- um, um, at this distribution, we are clearly not in the mean of that distribution but we are far wide of all that revenue and [ Indiscernible ] you see it. And we repeatedly talked about the factors, the factors being as broad as to the specific situation, we talked about, um, fallen angel [ph] clearly played a role, we talked about corporate scandals, um, um, Worldcom, Enron, stuff like this. And we talked an unforeseeable, unforeseeable drop in the recovery, um, drop in the recovery rate and, um, this in a way is clearly new feature of this, um, credit cycle, recovery rates are by far lower than they were in entire recession is in very difficult, um, in very difficult years such as '92, '93. If you take the TNT segment, I mean in some cases, there are any recovery values left even for, um, the creditors, and, um, therefore, recovery rates were down to zero, um, these corporate scandals or so, they could not be foreseen. So, the matter of the fact is that our loan-loss provisions this year clearly exceeds, clearly exceed, um, the expected loss and, um, I can -- I can say, um, that this one, between the number you mentioned and the numbers we will come -- we are now at this different clearly is attributable to these, um, special factors which I mentioned.

Okay.

Fair enough, David?

Thank you. Yes.

May I suggest in the interest of time that we take one more question.

Thank you, our last question is from Daniel King. Please go ahead announcing your company name.

[ Indiscernible ] I have three questions. Hopefully [indiscernible] brief. The first point is on net interest income. If we look at the underlying level and we're just trading profit, is it -- [ Indiscernible ] In Q3 versus Q2. There is some discussion in results not be a dividend season, and you've obviously got the deconsolidation of the mortgage business. Could you comment on that.

The second question relates to, um, the stock option issue or the stock issue to start, for which you took the hit. Is this stepping up the use of actually based compensation and CIB. Obviously it would be one way to deal with the cost issue at the moment.

And the last question relates directly to the mortgage business. What contribution is your share of the mortgage business making in terms of accounts for in equity. Thank you.

Yeah, um, net interest income, I mean let me firstly mention that the breakdown of revenues into the financial accounting revenue categories is interesting but it's not very -- it doesn't lead to very meaningful, to very meaningful results. Um, as you know in, um, in interest revenue, in interest revenues, are also included, um are also included. The interest piece, which belongs to -- [ Indiscernible ] Therefore, in order to assess our trading performance, I clearly -- I clearly refer to what we have report in the segment, and when we discuss CBNS, this gives a much better picture. And clearly, if you take out, and we gave the necessary information, if you take out of net and interest income, the interest piece, which belongs to trading, um, you end up you know with a lower number. If you compare these numbers, you do have a decline, as far as the third quarter this year is concerned, compared to, um, the prior quarter, and this is primarily attributable to, um, the dividend season.

In Germany, the dividend season is the second quarter, and also, attributable to the deconsolidation of Hugo Hypo. If do you the comparison with the same period last year, um, you have to -- I mean the third quarter last year, um, the difference even though being big is entirely attributable to a reduction in the loan portfolio, the deconsolidation of [ Indiscernible ]. Also the consolidation of Deutsche [indiscernible] because life insurance companies have the habit you know to lend some money, you know, mortgages and that stuff. And, um, again, the Hugo Hypo effect. But it's clear. I mean if we reduce our industrial holdings and our loan control, it affects us through -- in interest.

I just felt there was a rather huge -- if do you the adjustment --

I have -- I mean I must say I have the number at my finger tips. Therefore, I am convinced that I'm saying the right things. If you want to have the specific numbers I refer to, um, have -- we will walk you through offline.

Okay.

On stock, I know of those with special appreciation why issued in '99 and 2000 and not later. Um, on the market, though it's nothing you know that we use certain instrument to um, to distribute more value in terms of bonus to our employees and -- , and um, um, not reach out and fully affect the P&L. On the, um, the mortgage, I mean, I guess your question was, what our participation is, it's about the new Hugo Hypo, it's not finalized yet, but we're close to the numbers, which we have used for accounting the gains on this transaction, was 41.1%.

So, how much contribution accounted for an equity associate which it is in this quarter? How much contribution does it make?

We clearly do have the first time, um, when we do have an equity pickup is in the fourth, is in the fourth quarter, um, because, you know, the closing of the transaction was August, um, very much towards the end of the August, and um, as far as the, um, first equity peak in the fourth quarter, and I do hope that it will be a positive number.

Thank you.

Well, um, I know there are some leftovers and I know there are some questioning -- questions, but I would ask you in the interest of time, that we close the call here, um, it was a pleasure for us to hopefully add value to our printed material we distributed and I thank Clemens for his time. Thank you all and good-bye.

Thanks. Thank you also from me.

Thank you. That concludes today's conference call. You may now disconnect your lines. Thank you.