Deutsche Bank AG (DB) 2002 Q4 法說會逐字稿

Ladies and gentlemen, welcome to Deutsche bank's annual analyst meeting. We have released our 2002 result this morning before the European markets opened and on this occasion, we would like to give you a full presentation, which will be done by Joe Ackermann who is with me, chairman of our group executive group committee and our CFO Clemens Borsig. After this presentation, as usual, we will enter into a Q&A session with you. This event is transmitted by webcast as well as by an international conference call. Please switch off your mobiles and we are ready to start. Joe?

Good afternoon. Welcome to Deutsche Bank. Let just in summary say a few words about the performance before Clemens get into details. In terms of revenues, I think as you have seen, the underlying revenues the way we define it have held up pretty well over the previous quarter. In the the fourth quarter it's 5.2 billion Euros, and the underlying revenues for the full year 2002 were down 10% year-on-year to 22.8 billion Euros.

Provisioning, as Clemens indicated at the last analyst conference has peaked in the third quarter and has since declined and are completely consistent with what we forecasted in October. Costs are clearly down, 3.8 billion, including actually 200 million from we'll call it one-offs, especially the SEC litigation and other legal case and complication, co-investment issues in connection with the private equity divestment and we'll come back to that.

We have taken the liberty and that's why some of you were probably wrong overall. I think we were pretty close to what we said. You were very accurate in your forecast, but we have done, we have decided to sell the private equity pieces and we are in advance negotiation route now in the first quarter actually within the next two or three weeks, and we have taken already writedowns on that.

So something which would have happened in the first quarter, if you hadn't done it at all, if you have kept it, it would have kept it in the reporting unit, and of course, you wouldn't have had any adjustments here, so that's a co-investment payout, buyout that you are making and some other things you will hear from that.

So all in all, that's up to roughly 300 million, and then we have Telecolumbus as available for sale now and we have made necessary adjustments there. Also, if you have kept it within the reporting unit, this wouldn't have affected us in the fourth quarter, and then you have another adjustment for Girling (ph). That's probably a different story.

Earnings underlying pre-tax in the fourth quarter was 0.2 billion. Now, as I said, including this 200 million from this legal cases, you could actually from an operating point of view say these are one-offs. So we add them to 400 million, so we want to be consistent, and of course, we want it to be conservative here. As you know, we had a loss in the same period of 2001.

Full year to a full pre-tax profit is up. Of course, as we all know to some extent, to a large extent even by benefiting from capital gains, but I must always say if someone says we have sold crown jewels, I'm happy to have sold them, and you know, we can buy them back any time at the third of the price we have sold them so in that sense, talking about crown jewels, which melt away into the river is probably not a very clever thing to have. I think it was very good that we used them to clean up our balance sheet and to stream line our operating platform, and I think that's exactly what we did.

Overall, the underlying profit was down from 2.2 billion to 1.9 billion, but knowing that we have added 900 million plus in provisions, I think that also demonstrates the real operating performance of 2002 including some of the charges suffering from, but as you know in the loan business, you actually get the price to pay several years later, and that's what we are doing right now, and that's ultimately the reason we have clearly changed our risk management.

Now, a few words to the strategic initiatives as I explained to you -- several times. Performance management are really focusing on operating profit, knowing that we can't alone rely on capital gains, and we don't want to do that, so we want to strengthen our operating performance. Secondly, the focus on core business is actually just a consequence of what I'm saying, getting rid of businesses which either we don't see a chance to become world class or where the profitability wouldn't justify keeping it. Then third improvement of capital and balance sheet management and PCAM, something that has cost several times in the last two years.

First, the cost savings, they are down by 3.8 billion year over year. If it takes the fourth quarter run rate, we are actually at 5.2 billion, and I don't want to be overly optimistic, but that doesn't include yet or exclude the custody business, which is still in December, still in in January and closing has now been on January 31st, same is true for passive asset management and of course, for the private equity pieces as well that we are selling, so there's still some cushion in it, but it's clearly much better than the run rate we committed to you last year.

The 17.6 is something that I think says a lot of operating leverage and that's certainly something we will keep in place and cost discipline is not yet over. I will come back to that. It's very important that we keep this momentum in place even as we enter the second phase now.

Now, the work force reductions overall, we have come down from roughly 90,000 people to 72,000 people at the end of January. For the full year, we expect this number to drop to 69,000. Now, this is easily explained by this chart which shows that we have realized 80% of the job reductions. All the others come from divestments and outsourcing, job reductions, so still a little bit less than 2,000 to go.

We actually just got the agreement with the workers council. That's important for two things. We were not allowed to take any restructuring charges a year ago because we didn't have the agreement of the workers council. I think it's important to understand that some of the special elements of the German system, and of course, it took us a long time before we could start to really reduce jobs. Now we have all agreements in place and we can do it over the next few months and we will see that the 100% will be achieved within relatively short period of time.

Then profits on core businesses. I think it's important that all we have announced and promised to do we have concluded with no exception at the end of January the last closing of passive asset management and we're now in the process of selling part of the private equity, which, I think, is a good thing, not that I don't believe that private equity can be attractive, but it's more attractive for people who can take a long term view as a private investor. That's fine. I don't care whether the quarterly solves this up or down and it's a longer term perspective for a bank which is measured against quarterly performances and certainly in the current environment is not a good business. We're aggressively using that and starting that and Clemens will give you more details on that.

Then the rich (ph) graded assets we have reduced from 322 billion to 237 billion. Now, as part of fee consolidation, of course, your hypoDFS (ph) is part of a currency impact, and it's also to quite some extent a much stricter lending policy and a much tougher risk management and bringing actually the loan volume from 260 billion down to 170 billion, and I think that's something which also clearly demonstrates that we are not very interested in lending.

The share buyback has been pursued. We are now at 38 million shares at the end of December out of the 62 million which were authorized to be brought back and despite the purchases since actions we have increased tier 1 to 9.6%.

The optimization of the PCAM (ph) franchise, if we start with the income before non-operating costs, we were a year ago at 287, and you see we lost money in retail banking. We made a bit more money actually in private banking and less in asset management. We then added the real estate writedowns which were one off adjustment and we got for the underlying pre-tax profit for 530. This year, the income before nonoperating costs is 1.6 billion.

Now, this includes the roughly 500 million gain on sale of subsidiaries above all the Harold (ph) sale, which we take out to show you the underlying pre-tax profit which is 1.1 billion, but if you take the different elements, personal banking is clearly in a much better shape, and I think as I told you last time, we are optimistic that we increased this number to 800 million and then to a billion over next year and the asset management up from 174 to 450.

As I say, over next year, I'm always talking about 204 because we are at the beginning said that 203 will be actually the starting point. So this year, we are still having some severance packages in the workers council did not agree to an agreement earlier, so in retail banking, the restructuring severance packages are still being paid this year.

And I would like to focus on a little bit of that because this is a major concern to probably all of you and rightly so. I would say that the -- we are suffering from the DAX, DAX was down 44% and the Dow was down 16%. We outperform our peers, but that's very relative. Actually, we have lost two ranks globally from 23 down to 25. Euro helped us a little bit. The DAX didn't really help us at all.

Now, it's very difficult to move completely against DAX, but I think that there are two things. One is how much is the -- our share price part of the DAX and secondly how is actually our German business, and I think the story here is a completely different one. We are, first of all, less dependent on the German economy as most people anticipate, over 60% of our revenues, as we said before, are generated outside of Germany. 43% of our people are in Germany and all the others are in other parts of the world, but more importantly, the niches we are operating in Germany are good ones, and I would like to highlight this a little bit. First, we have an increasingly profitable German retail business, and I give you a little bit more detail, and the perceived penetration is much higher. I don't want to be across the board having a market share of 20 or 30%. I think it's much more important to have a high market share in the relevant segments, and I will show you where we are then.

Secondly, the mutual fund business, DWS (ph), highly profitable with a very strong market share and equity development, and then, of course, we have sales and trading out of Germany. More and more, I would say dominating this market. It's just a very attractive piece of business. And the mid-cap business where we have clearly reduced our exposure and you will see more details later on in the last two years already, and you will see that in terms of provisions, the German market was not our issue, and even if it gets a little bit worse, I mean, even if it toppled and we wouldn't have the Worldcom's and Enron's of this world, we would be much better off, and I will give you some numbers to that.

The third thing is the German retail business, I just want to show you the market penetration by our target groups where we are really interesting and as you can see, we have a much higher market share than people normally assume, and that's much more important than whether we are in the mass retail.

This is not -- we are not mass retail people, but you see that 81% is of our pre-tax profit is generated in Germany. 19% in Italy and Spain. Secondly, DWS is now increased their market share to 25%, and here you see again that 81% of our asset management pre-tax profit is generated in Germany. Only 19% outside. Although, I have to add that this year, after having turned around the U.S. business, especially fully completed this cover integration, this number will certainly shift somewhat, but not in absolute terms. Of course, in relative terms. The mid cap exposure, which we have reduced over the last two years from 45 billion down to 35.8 billion and the interesting thing is that out of the 2.1 billion loan provisions or credit provisions, only 12% come from the mid cap market, so as I said, even if there's increase by 50%, we are not talking about material numbers if the others, especially the corporate scandals don't happen again. We are we moving now?

The important thing is after having streamlined the platform, after having reduced the cost, increased efficiency, we are more and more focusing on our core businesses. Our core business, you remember is 8, and I will remind you that the core investment business is still an important business, but it's more of a run of business. We are selling industrial holdings. We did so, I think as very difficult timing and relative to much better than what we would do now. Real estate, you're in the process of selling pieces. Private equity, as you will see shortly, we are reducing and all the others, we are now in the process of building up our franchises.

In Europe and this is from Thompson financials, if you add up the different market shares, we are already number one. We are now in global markets, and I think everybody knows very strong, we are in equities in terms of revenues after nine months, number four globally, and in M&A, we are certainly seeing very good signs. We are adding up the different market shares. Here, similar petitions and much better probably than most people expect and it's a good business for us. Also in terms of revenues and profit. The third that you see very profitable, very good business where we are clearly outperforming the market, gaining market share, and I must say I'm now in this business for almost 15 years and I've never seen that the bank is getting all the awards in this business, and I must say, this shows the intellectual leadership which we have created here. PCAM, we are number four overall.

Asset management, invested assets and in private management, we just started to build up this business, and we are slowly making those who just bought the small bank in the Swiss market, which was important to give us access to the domestic market and I think that will help us. Now, the performance management earnings and so certainly delivered what they promised, probably over-delivered, focusing on core businesses, all concluded. The further improvement also more advanced than what we said a few months ago and PCAM is getting its act together. Of course, if one wonders what's next before we start into any merger speculation, we did the first phase at the streamlining. We're focusing on increasing efficiency. We keep that in place. It's very important that we don't lose up again. We don't want to change. We don't want to fall back into old behaviors, but we are now adding more focus in terms of clients, product innovation, and revenues, so all in all, I think there's quite some substantial operating leverage just based on much lower cost base, probably lower provisions if things don't turn extremely bad after whatever happens in Iraq and revenues, I think, benefiting more based on our focused initiatives now on the revenue side and the positions we have achieved in the core businesses. That makes us relatively confident and optimistic for 2003 and I'm happy to say that January numbers exceeded our expectations. Also based and compared to a very strong January in 2002 as you probably all remember. Clemens?

Thank you. Good afternoon also from my side. Ladies and gentlemen, we have started last year to adopt international best standards by inviting you early in the year to our annual analyst meeting to discuss our full-year results and not waiting for the day of the release of our annual report on 20F.

Compared to last year, we have substantially improved the disclosure of detailed tables both for results as well as dismantle reporting. You will receive this detailed information this morning with the earnings release. The full analysis and comprehensive additional information will be made available to you in the annual report on 20-f which will be circulated on March 27. In order to bridge the time gap and deliver on your professional request for analysis of our preliminary results, I'm happy to review our results, both for the fourth quarter and for the full year, 2002. The formal presentation will be familiar to you.

In addition to discussing the reported numbers, I will also follow our practice of discussing the underlying revenues and operating costs to give you a clear transparent picture of the operational performance of the bank. Let me start with a big overlook over the condensed income statement. I just want to highlight here, in the fourth quarter, we achieved an income before income taxes of 237 million. Income taxes unfortunately came in at almost the same level, so our income after current taxes was less 9 million.

We discussed several times the reasons and impacts of the tax. It is something I advise you just to neglect anyway, and as far as the annual numbers are concerned, Joe mentioned already income before taxes came in at more than 3.5 billion, 97% more than in the year and in the year before.

In the fourth quarter, we achieved additional gains from our industrial holdings of roughly 500 or 500 million. Deutsche [inaudible] and Continental are the names. Then we took an additional net writedown and equity pickups in corporate investments of around 300 million. The bulk of it came from Girling (ph) where we took an additional negative equity pickup of 179 million. The total writedown, if you will, on Girling this year with this number exceeds 700 million.

The third item referred to something Joe mentioned before we took the decision to sell our late-stage private equity portfolio as well as Telecolumbus, and that has the accounting consequence that we had to reclassify those assets as assets held for sale and mark them down to market. In this connection, we took a writedown of 200 million on Telecolumbus.

As far as the MDO private equity is concerned, we sell it a little bit more than book, so there was a minor, you can see a zero affect. However, with in the reporting unit, corporate investment, the late-stage private equity portfolio carries some goodwill and that goodwill had to be written off and that was 62 million debit.

In addition to this, it was a decision to sell the late-stage portfolio. We had to terminate the core investment plan, and we took a 62 million charge against compensation expenses for the termination, for the termination of this plan and before the DWS (ph) sale has closed. Let me move on then to revenues.

Revenues in the fourth quarter were very consistent with the ones we had in the third quarter. Underlying revenues were lower by roughly 100 million due to the rounding. You see here 200 million, but the actual number is 116 million decline of the underlying revenue, so this is, if you will, within the range of tolerance. CBS, corporate banking and securities, flat. CIB, slightly lower as a result of lower interest, of lower interest rates, and so that was CIB. PCAM up by 9.8%, primarily because of asset management and I am going to discuss this in a moment, but also private banking and personal banking were up. The decline is due to lower revenues of corporate investments. As far as the total year is concerned, Joe mentioned the decline of 10% underlying revenues on an annual basis.

I know that you are always concerned about the revenue sources. I just want to mention here, you have a lot of detail in the material which we provided to you. I want to caution you a little bit because those numbers are financial accounting numbers. We won the bank based upon our management accounting. That means we measure our performance against the full mark-to-market valuation of all of our trading activities and there are some -- and there are some differences, but one thing I want to mention here, which is important on interest, if you take out of interest trading related interest, you see a reduction of 1.8 billion. Let me explain where this 1.8 billion is coming from.

1.1 billion is the result of the deconsolidation of gyfaislde (ph), which took Eurohypo (ph), Deutsche Herald (ph), and others, so that is the principal driving force behind this decline was the deconsolidation. Secondly, as a result of us having sold our available for sales securities, say the industrial holdings, our dividend income has declined by roughly 300 million, clearly the lower dividend rate we had on Daimler last year played also a role, and the balance is lower interest from our loan portfolio, but this is not a deterioration of the interest rate margin, this is a reduction of the reduction of our loan portfolio.

Costs - Joe mentioned this already, have come down very, very nicely, and we can say that we have made substantial process as far as our cost base is concerned. As far as fourth quarter and the comparison of the fourth quarter vs third quarter is concerned, I would like to mention here that in the operating cost base, there are two special one-off factors. The first factor was already mentioned by me. That is the 62 million termination costs for the co-invest, and that is roughly a little bit more than 100 million for one-off litigation costs, SEC litigation being the name.

I leave it to your calc, to your assessment and your calculation what you do with those items. As a fee disclosure rule, I'm not permitted to take the difference, but analysts still are. The composition gives the breakdown of our operating cost base into comp and non-comp. Clearly, this litigation item, which I mentioned played a role, played a role in non-comp expenses. They would have come down, but that wasn't helpful, and as far as comp expenses are concerned, they would have come down even further, but I do believe also the annual numbers look quite convincing. Underline pre-tax profit, Joe mentioned 240 million in the fourth quarter. I will show you that those 200 million came entirely from PCAM and CIB, and as a matter of fact, their underlying profit is much higher. The special effects of the reconciliation between reported and underlying are mentioned here.

I mention the gain on industrial holdings. The FAS 133 effect on industrial holdings deminimus. The writedown is Gilding (ph). Net gains from subsidiaries we disposed that is something like easy cash. The writedowns on assets held for sale, I mentioned and then we had roughly 100 million in restructuring and severance. Once again, if we hadn't had this special runoffs, our underlying pre-tax would look very good. Because income ratios, you can see here, the underlying cost income ratio, quite good in improvements, both from a quarterly point of view as well as the annual numbers.

The following charge is something we are very proud about because it clearly highlights that costs have come down much faster than revenues declined, and as a matter of fact, for our cost reduction efforts written upon the overcompensated for the effect of lower revenues, as you can see, the underlying pre-tax profit increased by .6 billion as the result of this aggressive cost cut. However, this had an impact 900 million higher, loan loss provision, and those include the general gyration adjustment as a result of our methodology. Even after taking into consideration the loan provision, the underlying pre-tax profit is down only 15%, which we do believe is a respectable result in a very challenging year. Let me now move on to the divisional numbers.

Our disclosure as far as divisional numbers are concerned, you know, concentrate on reported earnings and on income before non-operating -- non-operating costs. As you can see, and PCAM substantially improved their profit performance in the fourth quarter compared with the third quarter of the same year, 700 million in corporate and investment. We do see the effect of lower revenues and the writedowns and that stuff, I talked about, the co-invest, it's also included in corporate investment. Consolidated and adjustment, this 100 million is primarily the result of these SEC litigation of this SEC litigation issue and the nonoperating costs of 100 million in severance spread all over the division, so the 300 million and 400 million CIB and PCAM are at the same time at the underlying result.

Just as a reminder, the 800 million, PCAM came in the second quarter and includes the 500 million on Deutsche Herald, and the negative 200 million, or CIB, in the third quarter, does include the general and valuation adjustment of 200 million, which we did in that quarter. The next job gives you the annual number. CIB, clearly lower revenues, as you can see. Higher credit, credit losses could not be compensated by cost declines, but as you can see still a substantially positive result here. PCAM is positively affected by the 500 million, but even if you take out the 500 million, you end up with something like 1.1 billion. Corporate investments is the result of us having sold precisions and having taken charges. You have in your material the respective reconciliation. CIB revenues. Here you have the development of the underlying revenues and I think the numbers speak for themselves.

When we talk about sales and trading, those are the numbers we look at not the financial, not the financial accounting numbers, and what you can see here that is sales and trading, equity and debt and other products combined in the third and in the fourth quarter was absolutely the same number, 1.8, 1.8 billion. As far as the annual numbers are concerned, the decline in sales and trading equity, clearly reflects the very difficult capital market environment and also the impact, also the impact of that one block trade we talked about after the first quarter. I also want to remind you the sales and trading debt of other products is not 100% identical with global markets.

We do have another trading desk, which is a trading desk securitization of the valuation of that global market is flat year over year. Again, the numbers speak for themselves. The other here is the next is then the underlying profit and as you can see here is impacted. The rest is impacted by the added credit environment, and at this spec, you have 3.6 billion gross profit, if you will in 2001 against 3 billion in 2002 and this on the basis of 17% revenues.

The ratios improved. Let me move down to PCAM. You see here an increase in revenues quarter over quarter, and also for the fourth quarter, year over year, as far as the full year numbers are concerned that increase of 4%, we have to say is almost entirely due to first-time consolidation of Scudder (ph), but with a positive note, if you adjust for Scudder (ph), you still slightly higher revenues in a very difficult environment, and this underlines once again, the ability of Deutsche Bank in PCAM to generate solid revenues every quarter.

The next slide gives you the breakdown by division, and you can see here this increase in asset management. Part of asset management business, as you know, is real estate and in this regard, they have to go to fourth quarter. Cost management also very, very effective, and the charge then we are very proud about is not only consistent revenues, but also consistent earnings, the deviation in the fourth quarter we gladly accept because it goes in the right direction.

As far as the annual numbers are concerned, as I mentioned from 300 million to 1.1 billion. Joe adjusted the 2001 number for writedown on the real estate, but even if you do this, you have a base in 2001 of 500 million and an increase of 1.1 billion. I do believe this is a very, very credible result and clearly demonstrates that PCAM not only has turned the corner, but performancewise very different.

Those are the ratios. They all look good. There's one exception, this increase on 76 to 79. In the fourth quarter, I want to address this head on, and you will not be surprised when I say the impact is a softer writedown. We had this two years ago, and so we had to have written off in connection with our restructuring of the e-trade business. We had to write down some capitalized software, but I don't think this is something we need to talk about a lot.

Credit. I want to discuss credit in a little bit more detail than in prior analyst conferences. The first is we talked about a reduction of our risk exposure in credit and this chart clearly shows that we have achieved this. Admittedly and particularly with the success was in 2002. Clearly, deconsolidation played a major role here, but us selling those businesses or bringing those businesses into joint venture clear also the motivation behind wars to reduce our own loan book. This didn't happen by accident, but this has been consistently our strategy, but I can tell you that we also achieved on a fully-adjusted basis for deconsolidation, for write-ups, a reduction of our loan portfolio of around 10%, 25 million, and we, again, consider this as very respectable in a very difficult market. The next line is in line with U.S. GAAP disclosure.

You can find this in the 20-f. It's a little bit streamlined so the method gets across easier. I read in one of those reports we had a corporate loan book of 125 billion. This I can gladly say is not correct. You can see that our corporate loan book accounts for around 90 billion and not 125 billion, so it's 25% lower.

What's also very important, the German corporate loan book, which is a major concern sometimes to you and to some investors makes up 20% of our total, of our total loan book. Again, as you can see, the [inaudible] makes up -- 39% of which half is mortgage in Germany and in this case, primarily residential mortgages and our experience with credit loss on German residential mortgages is very good. Risk provision, it was the assumption which I expressed in the last conference call was a bold statement.

The term then bold was used by German analysts in the wrong way, in a negative way, and I don't think it was meant to be negative, but in the translation, it came out very negative, but as you can see, I was right with my assumption. Credit losses have peaked in the third quarter or at least what we can southeast say in the fourth quarter, they came down. -- loan loss provision. In this 12%, is included of the provision for Philip Hoffman (ph) and the provision for Deutsche Babcock (ph). It's all in.

I can also say that as far as the German mid-cap portfolio is concerned, as far as the PCAM portfolio is concerned, our loan provisions in 2002 have been very much in line with our expectation. The disappointment, as I repeatedly said, the disappointment came in developed markets and in our approach at project finance, being a business which we discontinued two or three years ago already. That's where the disappointment was and in this regard, perhaps the next chart is interesting to you because it shows two-thirds of our specific loan provisions, 1.9 billion, 20 names account for two-third of that number, 9.1 billion, and that's 1.1 billion, 250.

And as you can see, it's the U.S. predominantly the U.S., the credit market developed market. Germany plays a minor role here. In Germany, this is Phillip Hoffman (ph), Deutsche Babcock (ph), a bit Kurrish (ph) and a bit on this Lombard (ph) credit on Mobilecom. What's also important if you take this two-third, this 1,250 billion specific loan provision, 25% of this comes from the old project finance portfolio. So its developed market, WorldCom and the like and it's the old. It is definitely not, it's definitely not pieces like Joe mentioned. It's not Germany. It's not the German mid cap portfolio, and again, even if our credit losses in those portfolio increased by, say, another 100%, it wouldn't be the end of the world for us. But as we don't have any indication of additional corporate scandals and so on and so forth, we tend to believe that credit losses have peaked. At least we don't have any indication that this statement is not correct. Problem loans have come down in a difficult environment and once again, they are reserved. We know if you do peer comparison, other banks have different coverage ratios, but I would like to remind you that this very much depends upon the composition, the composition of the loan portfolio, whether it's consumer credit or corporate, and it very much also depends on the collateral situation, and we do believe if we take, if we have the total loan loss provisions which we have plus collateral that we are well reserved.

The next chart is something you all are familiar with. It shows the affect of our reduction strategy in alternative methods. The first line is real estate. These are all own buildings. The bank buildings, which we own. You see here an increase. This increase is entirely attributable to the CBS which we are building here in frank fort and we took the decision two years ago to build that building and we couldn't stop it, but I can say that we have developed a strategy to reduce our exposures as far as our own bank building is concerned, and we are, as far as transactions are concerned, at a very late stage. Private equity directs the 3.5. We just announced that we signed the comprehensive letter of intent. That is the of the late-state private equity portfolio. This will give us relief as far as the balance sheet is concerned of 1.2 billion and be retained of 20%, and this is the hedge to the carrot interest.

As far as private equity funds are concerned, again, we are working here on transaction to reduce our exposure. As far as PCAM real estate investments are concerned, I guess we discussed this at a prior occasion, but we are changing here our business model from a principal investment to third party financing and once again, we are here in an advanced stage of a transaction to reduce this position. So the number has come down, but we will see much more progress going forward. Tied capital management leading to substantial reduction in risk-rated assets. Something Joe mentioned before and what's very, very important here is that even after adjustment for 4x and deconsolidation, we substantially reduced our risk-rated asset by very tight management. The tier 1 ratio was also mentioned by Joe.

Ladies and gentlemen, let me summarize, in 2002, we very successfully implemented our strategy of cost reduction, of reduction of credit risk exposure, of tied capital management and strengthening of our asset base and maintain profitability, and those successfully implemented strategies resulted in a significant transformation of Deutsche bank, as you can see here from these key figures. This concludes my presentation. Thank you very much for your attention and Joe and I are very happy to answer any questions you may have. Thanks.

Thank you, Clement. Thank you, Joe. I think the stage is set, and we can go right away into the discussion. We have three microphones in the room. In the interest of the acoustic and listeners from the outside, and I would ask for a clear hand for who would like to start this round. We here in the middle.

Yes, hello. I have three detailed number questions, please. The first question is on the PCAM recovery, especially in the subdivision asset management, it looks quite impressive, but I do see that you have sold a lot of your property fund portfolio to boost quarter fourth numbers. I see in these so-called other income line within asset management, 160 million asset revenue. I want to understand how sustainable you think that revenue is, whether there's a new strategy of active reselling or property funds, et cetera, so could you explain that part of the recovery in pecam.

The second question is regarding more toward the underlying net interest income line, which maybe I wasn't fully understanding either. I look at your risk-rated asset which have come down year on year 22%, and I also look at your net interest income line without looking at the trading interest income, so that has come down 26%. Now, when I see that, there must have been something happening apparently with margins. Could you sort of highlight what's going on, why maybe the profitability of the remaining book has come down and also in philosophy terms, when you're selling and actively reducing risk spread assets, do you think you're reducing the very worse portfolios? Maybe you can give us some dynamics of what's happening there.

Lastly, but not least, could you give us some indicators of your affects impact on the group cost in revenue, especially on the investment banking side, how the recent dollar movements have affected the results. Thank you.

The subject of other revenues within underlying revenues has been a subject in many of our discussions here, and I have consistently said that something as far as the group is concerned in other revenues say between zero and 500 million can be expected every quarter. What's very important specifically to your question is real estate is a very important part of asset management strategy. It's an important asset -- it's an important asset class. Is it recurring? Very much so. Very much so, and we will see a growth of that business. You know, we acquire grief. The leading management company in the U.S. early this year, and this underlines the importance of real estate as an asset class, and as a matter of fact, this is at the moment, one of the most attractive asset classes there is for investors, so there's 160 -- this 160 million revenue is not an operation. The only thing I can say about real estate is, you know, it's not steady every month, but -- and the revenues are more concentrated in the second half of the year and in the fourth quarter, but it is absolutely recurring and we expect it's sustainable. It's consistent, and we will even see more of this.

On the net interest -- on the net interest margin, the bottom line is our net interest margin has not deteriorated on the net interest margin on the loan book has not deteriorated. On the contrary, it has improved and it's on its way to improve further. What's important here is that net interest, I think in the financial is more than just interest on the loan book, and I wish to -- I want to mention here, for example, dividends and those kinds of things. Under, we could aim advertise our expected dividends over every month. This is not possible under U.S. GAAP. We have to account for U.S. dividends when they're paid. In Euro and particularly in Germany, you know the dividend season in the second quarter and therefore, we always have a little bit of peak in the second quarter. On the third question what is the impact on 4x, let me say this at this point in time, because we are still here in the process of analysis, as far as the bottom line is concerned, it's a wash. That means on group level, it's a wash, but it's also a wash as far as CIB is concerned.

Next question, please. We have it there. Miss Fiona.

Can I ask three questions? On the staff costs, can you talk about how you paid in options? I have you did some of it off-balance sheet. Also, have you changed your mix of equity compensation in the investment bank? Because I understand under U.S. GAAP that might be treated rather generously. Secondly, on the project finance, I didn't totally get the numbers. Were you saying that 25% of the provisions were in project finance, or was that 25% to 60% and lastly, on the risk-rated assets and loans, is there scope to reduce the balances further in '03?

Let me take the third question. Yes, we are in the process of analyzing very carefully a more sophisticated portfolio management approach on a lending basis. Probably have a consequence that we are further reducing risk-rate assets, not which is important, not getting out of the lending operations, but not having the same number in our books but that's something we are right now in the middle of. This is pretty advanced, and something we want to move on.

As far as the change in accounting for optimum equity linked compensation and on how U.S. GAAP is concerned, the Newell has just come final. We are still in the process of investigating what's the impact on us. Clearly, we will comply with this changed accounting standard. Project finance, 25% of the two-third.

Next question, please. Okay. Can you pass this through? Marty, could you? Thank you. Maybe Derrick first and then the next one.

Just a couple of questions. One is on the equity sales trading relative to competitors, it seems you had quite a strong quarter. I wonder if you could just describe whether the quantitatively what has happened there? Has it been in the derivatives area, how you see your customer business and equity sales trading progressing? And then coming back to the risk-rated assets decline, you're showing 20 billion of the full-year 27 billion Euro underlying decline took place in the fourth quarter, so what sort of mechanisms did you use to reduce risk-weighted assets? Was it securitization? Was it something on the market risk? What else?

Well, the second question, all mentioned and it's just basically exiting relationships about not renewing commitments and reducing commitments yearly talking to people and saying we are no longer the lending bank as we were two or three years ago. That's included. You are talking about the 27 billion. And the first key equities, yes, actually, we have done the thorough peer comparison, and we're actually very proud that quarter over quarter, as I said, we were at the end of the third quarter number, four globally, and also though, although we had this unfortunate hiccup in the first quarter, otherwise, it would have been number three. Derivatives, which was very, very strong in the previous years was somewhat weaker in 2001 --2002 sorry, and it caught up in the first quarter -- fourth quarter. And the cash rating was actually stronger in the U.S. than Europe. Market was down more, volumewise, and then you have the prime services pieces, which would take it well, which are building up, so all in all, we were clearly having a good fourth quarter in the equities business, but it's also a little bit reaction to what we had in the first two quarter because of year ending.

Two questions if I may. Firstly, can you give us a sense of what at the options expense would have been in 2002 if you had taken that through the p/l? Secondly, there was a small outflow of money under management in 2002. Is this in any way a concern or trend? Thanks.

On the option expense, I can say I won't give you a number. As you know, that is not an agreement analogy. People apply different methodologies. They have different ones then leading to different results. There was an article in the "financial times" the other day saying that the heat on the subcheck (ph) really has come off, and it was a hot subcheck (ph) after then and now it's not that much in the middle of the discussion. I must say here, clearly, I'm not an advocate to include option expenses in the p/l. We made transparent in the 20-f, in the notes what the options outstanding are, at what prices, so on and so forth, and then it's everybody's guess or calculation what the impact -- what the impact is. We have enough volatility in the p/l as a result on the accounting standards.

We don't need additional volatility and if we had to expense options in our p/l, then would you ask me if you adjust for the option expenses and the changes, what is the result? And to give you an example, a company shortly before bankruptcy, their stock price collapses dramatically. As a result then, you know they can release their accrual of the option expense, you know, because they're resulting in a fantastic p/l 5 minutes before bankruptcy. Is this a result which we really want to have?

So we will take them out of the underlying anyway, if you take FAS 133 from the beginning, first quarter of 2001, I isolated and made it transparent what the impact is of our hedges on industrial holding and I guess the strategy served as well in terms of transparency. So I don't want to talk too much about accounting, but it was an ideal opportunity for me to say we should not go this route. Thanks.

I think second question was, -- asset management. It's clear that asset management being on the block has not attracted new funds, but if you go through the differences, primarily, there's no major. These mutual funds is just normal thing that you always have at year end which normally comes back in the first quarter so if you exacted the currency impact, I think it's pretty stable and relevant.

Then we start here in the middle and then we can come over there.

A question on this other income in asset management. Does this warehousing that there's real trading gains or are there other impacts on the p/l. For example, fees for setting up funds?

No, they are not trading gains. If there were trading gains, there would be in trading -- in trading revenues. If they were fee income, they would be -- they would be under commissions. The rules, once again, I mean, you put a lot of emphasis on this classification on the U.S., and I tell you it's not that. For the group, I will give you an example. In the group number, there's a gain of 100 million on a loan held for sale, and I don't -- if we take a loan held for sale and it's not a trading position and we Milwaukee a gain on it, then it's upper income. This is really part of our regular business, and I have not written the standard and I don't know why, you know, we sell a loan held for sale, why this is other income, but I can tell you here is that we take out of upper income our components which we consider as not being underlying and not belonging due to business and what we leave in is really part of the business. We will clearly provide even more transparency than we have today than in the 20-f and disclose what's in that other --

In the specific case, what is it really?

To make it clear. It's a gain they made up in selling the fund in the U.S.. It's a U.S. -- it was in the U.S. When you set up a fund, you can buy it earlier and then make a trading gain, or you make or you get fees.

Okay. Now we are talking. It's only a trading gain if the asset is held as a trading asset. But our real estate, I showed you PCAM real estate, those PCAM real estate are not trading, not trading positions. We don't mark to mark them every day, and therefore, they are non-trading position and therefore, the profit crystalizes the moment we sell. In other words, it's where you increase books of other income.

Yeah.

Can you hand this over to Matsiko (ph).

I have two questions. First question regarding private equity. You are going to exit 3.5 billion in private equity volumes in 2003. My question is are you assuming any fallouts after the exits? Are you giving any guarantees there? The second question was to verify a figure, which I think I hear at the press conference. When you said the bonus payments in 2002 totaled 3 billion, is that correct?

What I said is in this famous management case that we will talk about 28 million Euros. I said, Deutsche bank is having a bonus pool of over 3 billion, and you know, how can we do business out of this country if this is criminal? This is no longer possible. I hope it doesn't come that far.

No, we are doing it. As Clemens demonstrated, we are now doing this management buyout, most likely which brings us down from 3.5 to roughly 2.3, and then we have Telecolumbus in here which is marked down, and two or three others, things like that, so what -- if I say the core private equity would then be roughly a billion, and this is something we liquidate over time. We have no hurry, but the financial impact will be what we see.

We can pretty well live with a billion. I don't like to live with the 4.8, 8 billion, or even more so a year ago, so I'm not saying we shouldn't have private equity investments. I just don't like to have it in the magnitude that we had it, so we will run off that over time, and we may also add from time to time a transaction, especially in the German market, you have going private. I'm not saying that we are no longer available for business partners in private equity. I'm just saying I don't like to have this number in our balance sheet and to have to the volatility of this business every quarter.

Just to come back to the finance development which fell to 11 billion by 2 billion in 2002, could you tell us, please, how much of that perhaps as a rough guess was really by bringing down bonus accruals, bonus payments and how much was really organically or addressing the infrastructure?

That says it fully. It is clear that we are going to achieve the efficiency gains and I think we have demonstrated that. We also said that we are committing to a reduction of discretionary piece. In the discretionary piece, it has been so important there is a bonus element in it. That's why I also said that discretionary piece can a little bit move against us if markets completely turn around one day. How much it is, I would not like to disclose because it's one of the best-kept secrets. If we said bonus pro would be down that much, people would immediately attack our people or the other way around.

I think we have two things which are very important. One is we have proven that our compensation is flexible, something people always said it is not. Secondly, that for 2003, our mortgage in the sense of guarantees is absolutely marginal, so we have a completely different starting point than we had two or three years ago. We are constantly coming down and we are on a very safe path here, which is very important, which gives actually more bonus to everybody. In relative terms. I don't like that some people get so much more and others have to suffer so much more, but it is clear, we had a global markets business which did better than last year, and we had an equities and corporate and finance business which was weaker than last year, I mean, 2001. So it is clear, and talk about bonus allocation that those who are outperforming all the others, they get higher proportion, but how much this is overall, I wouldn't like to disclose. It explains own -- only a part of the cost reduction.

On slide 63 of the presentation, you show the net interest term excluding that trading related interest moving up to Q4. I wonder if you could talk us through that movement given the substantial reduction in risk-rated assets. The second question is on the cost target, you pointed out in 2002, could you outline any incremental cost measures or cost reductions we can see going forward, or is your cost base now really going to move sideways and the third question is you talked about the exposure of the dollar and it would be a wash of great levels. Does this mean you are making zero profit from the American operation, which is why it's a wash?

Let me start with the cost. I think I am very clear in my presentation that we took the annualized fourth quarter number, which brings to you 17.6. In debt, you still have, first of all, custody base, FAS (ph) management. You still have not included the IBM outsourcing. You have not included the restructuring which is going on in the German and retail business, so all this, people -- not having been redundant from the 11,000 to the 14,400 is an impact. You can figure out what that means on the cost basis. That's the positive side. On the negative side, it's coming back to the discretion. Of course, if revenues come back. I assume you have to pay higher bonuses again, but that will be in relation to higher revenues.

David, on the other question, this is the slide increase. It's the result of lower funding costs in the first quarter. As a timber effect, lower funding is the result of reduced US fed funds and ECB rates, but we don't want to make too much out of it. We have the dividend income of 9 million.

Before now, as I said before, the detail for analysis we will provide to you at a later time.

It will have a negative impact below market on a before bonus line, but bonus, we have to see because a lot of is in stuff, and what it means for the group as a whole, we are not in position to give you a professional answer.

Can you tell us what we can expect on that problem? Do we have to expect another 700 million pickup, or do you think that this problem will be solved and in this year? And to the second question, it's relating to chart 26, and after this convincing face one, refocusing the businesses. You said phase two would be tell it to your clients, but the point, I can see on the chart are other points that every bank should do in its business, so I'm missing what's the difference between what you did before and what you did right now?

I'm just saying I don't want to get into any big gaps in sections and no type of deal discussion. What we are saying we have a lot to do. We have worked on the efficiency side, on the cost side, and we have a lot to do on the revenue side and that's where the focus is right now. We have always been focused on cost and last year, we focused on cost and we achieved results. We set milestones in terms of what you want to achieve in terms of share of wallet, and it pushes and in management, very often, it is not so important to have the grabbed size. It's important to have small steps, clearly quantitative and then really being measured. That's more important and that's what we are doing on this side now, and we have tremendous room for improvement.

We cannot have another 700 million writeoff. The book value is below 700 million and it's slightly below 500 million. Every quarter, we have taken a rigorous look at. We have the same asset quality, if you will, in this investment as in we are working on new solutions and as of today we have negotiations with interested parties which would taking lead to a final resolution. We will do a review as we have done so far of our assets here every quarter, but I hope we will come to a final solution so that I don't have to review it for too many quarters going forward.

Could we come back to your question because it's a difficult question, and I also get internally. The dependency to jump too fast to do something big, and what we really want to say is there is nothing big. We have not achieved. We have not achieved the product run that you have and we have not achieved a strong market position in many parts of the world. Although, we have reduced cost and we never jeopardized the franchise. Others are getting out of South Africa, getting out of Australia. We have kept the infrastructure intact, so whenever markets turn around, we will not have to rebuild, but we are still there and gaining market share.

We are extremely happy to have gained tremendous market share and equities in Japan and Asia last year, and we just want to demonstrate that there is nothing to be concerned about in terms of, you know, big moves, in terms of losing discipline and step by step, we're working on operational excellence, and that's what we want to demonstrate. Not exactly not big words, but just showing there is still the same discipline, but now more on the revenue side before more on the cost and the risk side.

Thank you very much.

Will you pass on to Stewart.

Yeah. I have a few questions, please. On the stock base compensation, sorry to carry on about this, but can you tell us how many options you issued in '02 and at what price, and secondly, can you tell us the figure for the stock base compensation and when you issue people shares that vest over, I think, three years and you accrue that through the p/l for three years or two years or whatever. Can you tell us what that figure was in the p/l and hopefully for '01 as well to make my life easy?

That was the first question. Second question, the Spitzer (ph) charge, pretty clearly investment banking is in CIB and can. Can you tell us what (inaudible) was please.

The first one is very specific and before I give you an entirely correct answer, and I suggest you come back to Monday and we will then be able to provide an exact answer. The way you phrase your Spitzer (ph) question is very interesting because I said it loud and clear it is in corporate -- that is a group charge. We discussed it at length, Joe and I, and we don't -- quite frankly, we came to the conclusion as CIB didn't do anything wrong, and that it was a settlement in which we engaged on the basis of not that we. That we feel guilty in any way, but that this was something that we need to accept. It wouldn't be fair and it was also distraught the performance numbers of our CIB, so we said, the best is to highlight it, to take it as a corporate charge, and to highlight it. Yeah. It is an operating cost that is how we define operating cost, and there was no way.

Not allocated to the business, but as a corporate charge. I presume that most other banks did the same.

I must say a few other banks have to be criticized. Our lawyers said and we said we're not Goldman and us are clearly on the low end, and I think it will be unable to relegate to other people, and they have not done anything wrong.

U.S. provision for the fourth quarter.

We don't disclose those do we?

To the limit was my disclosure on loan provision, and I don't have the number available.

Any more information in the room? I will give you warning if this not the case, I will close the meeting. We appreciate your meeting. We appreciate your interest in our stock. We're looking forward a challenging and in particular my Investor Relations team and on behalf of Clemens and Josef Ackermann, thank you very much. Have a safe way home. It look like snow is coming into frank fort again. Thanks and good-bye.