Deutsche Bank AG (DB) 2003 Q2 法說會逐字稿

Ladies and gentlemen. Welcome to Deutsche Bank's Analyst Meeting on the second quarter results, which were released this morning. Those of you here in Frankfurt just had the sneak opportunity of a preview of our marketing spot, which we will start end of August, and our new marketing claim at passion to perform.

I also warmly welcome those who listen in via the Internet or via our conference call.

This afternoon we would like to discuss our second quarter results. As I mentioned they were released earlier. Today already some interesting discussions, today. We will have accompanying slides, which are available in our Investor Relations Home Page on the Internet.

Having that said, I hand over to your host and speaker, the CFO of Deutsche Bank, Clemens Borsig. Clemens?

Good afternoon to you, over from my side to you here in the room, and to all of you on the call.

I'm very pleased to be able to report today very good, to discuss with you today, a very good second quarter for Deutsche Bank.

I guess we've picked the market trends in order to save some time. We clearly successful realized the benefits of our important operating strength, up with the transformation of the bank as it's out of our initiatives.

We had record high underlying pre-tax profit of billion two. Our respective key ratios all moved in the right direction. I'll discuss those in more detail in a minute. We realized underlying revenues of 6 billion. Clearly indicating that we fully benefited from all market opportunity -- market opportunities. The underlying cost income ratio came down to 74% and, as a result of rigorous management of risk and improved economic data, problem loans came down, the coverage ratio improved and our credit -- our provision for credit loss has declined for the third consecutive -- for the third consecutive quarter.

The income statement in the condensed form here, as you have already realized I'm sure, at this time our reported numbers and our underlying have come much closer together which is very good and perhaps one day soon we can forget about all these underlying and just concentrate on -- on reported numbers.

What -- no. One issue as far as this income statement is concerned is the income tax expense for the quarter. And let me address this issue right -- right away. We clearly came in with 500 million of income tax as reported and a tax reversal of . Why is the income tax -- we are income taxes in the second quarter too high -- so high? We always talk about a 39 percent -- a 39% tax rate but let me give you, in detail, the reconsegation .

Income before income taxes were 1.91 billion and that 1.91 billion we had tax exempt revenues and we had non-tax deductible expenses. The balance was Euro a positive roughly 160 million tax exempt which we need to deduct from our income before tax expenses. That gets us down to something like 930, that is the taxable -- the taxable income.

The income tax at 39 percent would have been as you -- most of you widely predicted something like 370 million. However, we had then a one-off effect and this one-off effect is the result of a new tax law in Germany which was enacted in April -- excuse me May. It was enacted early May and which resulted in a deferred tax liability which we had to take right away in the second quarter. It's not a tax -- cash expense, it's a deferred tax liability resulting -- resulting from this, so-called for the Germans . It's one-off. It's about a little bit more than 100 million and this a little bit more than 100 million is a one-off effect, as I said. And it's, if you will, the accumulated result of this new and, again, we had to account deferred tax liability and then we had a little bit -- a little bit an adjustment and this gets us then to the 500 million.

And as a result of our disposition of our MG Technology shares, we have the tax - we have the tax .

So, going once again, it's a runoff effect going forward. We still are in the 39 - 40% - or, we will be in the 39 - 40% range subject to no other of such surprises to occur - to occur going forward. It's something which we - something which we definitely don't like which we regret, but on the U.S. schedules no other way than to fully account for the tax - for the deferred tax liability. We couldn't amortize this tax liability or this tax liability over a - over a certain period of time.

In our constant effort to improve our transparency, you might have noticed that in our disclosure this morning we provided additional details on the trading revenue - on the trading revenue side. You'll recall we discontinued our practice disclosing trading performance number because that is a new non-U.S. GAAP numbers - number and we don't want and don't can disclose such numbers any more. And I promised to you the last time we spoke here to come up with something different which gives you more - gives you additional transparency.

And what we have now worked out is, A , is in line with international practice and it gives you a full reconciliation between the revenue categories on the - in the financials and our segmental - and our segmental revenues. And that you can see here - the trading revenues net on the P&L clearly is not in any way - is not indicative for the performance of our trading - of our trading operation. And it is anyway a number which needs a lot of explanation to be fully understood.

As we discussed before, in our trading operation we generate not only trading revenues but also net interest revenues but also - but also commission revenues. And as I said, industry practice is to combine net interest revenues net trading revenues and then to break down that total by division, and then we went a step further also by - also by product areas.

Just to give you a little bit of explanations, why has trading revenues net come down in the second quarter compared with the first - with the first quarter among others? And this is something we'll talk about. We had a mark-to-market expense on our loan on the - on our hedge on the loan portfolio of roughly - of 100 million and another 100 million negative mark-to-market on our hedge on industrial holdings. And those hedges do not qualify for hedging, and therefore the mark-to-market changes have to be recorded in the P&L. And they do show in this line trading revenues net, but those two hedges clearly have nothing to do - have nothing to do with our trading - with our trading activities.

For example, in corporate investment 56 therefore includes the negative mark-to-market on the hedge on industrial holdings while the 2,545,000,000 in corporate and investment bank do include our negative mark to market on our loan--on our loan portfolio.

Next, the following slide gives you some breakdown of this combined net interest and trading revenues by product and again, it gives you by business line and this gives you a more--already a much better picture. And as you can see here in sales and trading, sales and trading equity and sales and trading debt and others, the picture of bank looks much different to just the trading revenue line in the P&L and you do see here a much more consistent and a much better--a much better performance. In loan products, the decline to 175 in the second quarter is exactly adversely impacted by this 98 million negative mark to market on the loan--on the loan hedge. I will provide when I discuss the segmental results, then, the total revenues by product in more--in more detail.

Now let me move on to our quarterly revenue trends for the group. Underlying revenues came in at 6 billion compared to 5.6 billion, an increase of 8 billion--of eight percent quarter-on-quarter. And as you see, the reported number was 5.9 so reported and underlying came very much together and the only difference is in corporate investment and I will discuss this in a moment. As far as the year-on-year comparison is concerned, you have to take two the facts into consideration. Number one, consolidation; the net of consolidations and deconsolidations as we sold businesses and deconsolidated then, such as , which was poured into a joint venture, is now accounted for under equity accounting, then the sale of our global business, among others. Secondly, clearly the shift in exchange rate had an effect and I can only say I do not want to give you a precise number as this would be a non-U.S. GAAP number and I would have to explain this--we would have disclosure issues here, but what I can say is and you may--I hope you believe me, is that if the revenues in the second quarter 2002, we calculated those revenues the same exchange rate as of today's and only for the businesses which are in the group in the second quarter 2003, this number, 6.3, would be below six billion, so we clearly have, on a like-for-like basis, an increase 5%, this five percent decline, and the same principle applies to the half year numbers.

Now on compensation. The quarter-on-quarter numbers do show an increase of roughly 200 million; the precise number is 182. And I do know that this increase already caused some discussion all over the place. Let me explain this increase because bottom line, the declining trend of our operating cost space on a like-for-like basis is still intact. The operating cost base in the second quarter includes higher rate engineering expense, particularly in the area private and business client. Secondly, exit related expenses in France. And thirdly, as a result of our very good performance, our very good performance in sales and trading, but also a solid performance in investment banking, higher bonus accruals. This all compares to the first quarter.

The total affect of the, yes, the total number of those affects is roughly 400 million, adjusted for those affects. We would have had more of an increase of 180, but a decline by about, by about 200 million.

As I said repeatedly at prior occasions, once the performance is very good, we don't mind, we don't mind to accrue for higher bonus payments.

But on a serious note, our bonus accruals are based upon a formula so there is not too much discretion as far as we are concerned. It is just the performance and then it mathematically becomes the necessary bonus accrual.

For engineering expenses exit costs both affect the compensation, the compensation line, here the severance payments, but also the non-compensation, non-compensation line.

Underlying pre-tax profits came in a record level of more than a billion two. The reported number is a billion one. This one billion two is 30 percent higher than in the first quarter of this year and is 70 percent higher than in the same quarter of last year.

In this 1.2 billion are included our negative mark-to-market on the loan book of 100 million and the other fact, the exit costs of bank one and the engineering expenses for private and business clients. Combined those affects account for roughly 300 million.

Those expenses are clearly operating expenses and therefore we don't take them out. They're clearly operating expenses, but they give a certain indication about the profit potential of this bank, based upon the revenues, which we have generated in the second quarter.

The next slide is familiar to you in and therefore I want to show this to you. It compares our performance in revenue trends with our, and our cost trends and you see here, CD of the improvement, which we have achieved once again, confirming the transformation of the bank.

Headcount came further down, would use our number by roughly 1,600, of which 1,000, more than 1,300 were due to layoffs and as a result of this, our headcount now stands at slightly more than 69,000, than 69,000 people.

Let me just conclude the first part of my presentation about the group by highlighting the key, some of the key ratios. They're all at historical best levels. Historical as defined on the basis of U.S. GAAP, that means since we shifted to U.S. GAAP.

As I mentioned before, the cost income ratio came down to 74 percent. We managed despite the very good performance of higher bonus we managed our compensation ratio at 46 percent which is a very good number for us and the non-comp ratio came down to 27 percent.

As far as return on equity is concerned, underlying number 17 percent. This is clearly over and above of our cost of equity and so quiet for a few -- after a few quarters, we have clearly created value.

Profit margin, a number which I attach quite a bit of importance to has further improved to 20 percent. This is, for us, a good number and I would think also in a broader context, it's a good number and equity turnover has also improved.

So far the group let me now move on to the segment results. Those are the reported numbers. As I said before, as far as the second quarter is concerned, both in CIB and PCAM reported numbers and underlying numbers are almost identical. The only difference which we have is in corporate investment. Next page.

CIB we achieved very strong performance in corporate banking and security and which clearly offset the deconsolidation of our global custody of our global custody business. As far as CBNS is concerned, you see the increase from 3.1 billion to 3.3 quarter-on-quarter and also the same from last year. And this against a backdrop of the shift in -- the shift in exchange rates.

The following slide gives you the detailed -- the detail by business line. And as you can see here, a very strong performance in sales and trading. Very impressive performance. Sales and trading total up by 30 percent year-on-year and by 13% quarter-on-quarter. In equity you can see the numbers which speak for themselves. Quarter-on-quarter up 52 percent and year-on-year 61%. Also in sales and trading, debt and other products a very strong performance. We all know here that in sales and trading that we do have a seasonal effect and the first quarter is always the strongest quarter. That means that in sales and trading debt and other products, the division managed to fully compensate for the seasonal -- for the seasonal decline.

According to our internal calcul or peer -- internal peer comparison, we are now the top sales and trading house on a global -- on a global basis and this is true for both for equity as well as for debt and other -- debt and other products. This is one of the key characteristics of this second quarter, the outstanding results which we achieved in sales -- in sales and trading. I guess the numbers do speak for themselves.

As far as origination and advisory is concerned, you'll know that the market is still challenging, but I do believe that our achieved a very impressive - a very impressive result. And particularly if you combine origination and advisory, you see a quarter-on-quarter an increase of 16% year-on-year. We have this decline 17%, but this number is impacted, A)By the exchange rate, and secondly, we all know that the first half this year was even more challenging than the first half of last year.

Loan products - this number, 365, once again is impacted by this mark-to-market on the loan hedge of 100 million, so without that negative loan hedge, we would see - we would have matched the revenues of the first quarter. The year-on-year comparison besides the loan hedge clearly reflects - clearly reflects our reduction of the loan book. And therefore, this decline is in a way by design. This is what we wanted. This is the decline - this is the - as a result, as I said before - I guess I'm repeating myself - the reduction of the loan book.

Contracted services is also by design, if you will. This is the end of the second quarter or in the first quarter we deconsolidated our custody - our custody business. This division is also adversely impacted by the very low interest rates which we have.

Operating - the operating cost space down year-on-year, slightly up quarter-on-quarter, but once again I don't have to repeat myself here - this is the result of higher - of higher bonus accruals - primarily higher bonus accruals. Without those would have further declined.

Underlying pretax profit - as you can see, it's roughly identical to the - identical with the reported one. The decline quarter-on-quarter, this is once again the adverse impact of the loan hedge, but year-on-year a very impressive increase of 66 - of 66%.

PCAM - once again, PCAM demonstrated its ability to achieve consistent revenues. I guess the numbers speak for themselves and I don't have to discuss them to details. The following slide gives you - gives you the details by product. Clearly the exchange rate had an impact, but also - but also the market development of this and fund management in loan and deposit. That area was impacted by the low - by the low interest rates, but the only thing I can say is this is consistent. The operating cost space has come further down. The 1.6 - the 1.6 billion in the second quarter includes the aforementioned 100 million for reengineering PBC and all the share of the exit costs of bank bonds. Without those effects, the operating cost space would have come further down in the second quarter compared to the - giving comparison with the first - with the first quarter.

And further progress as far as the profitability is concerned, you do have here - we have reported number of 286, underlying and once again, this includes the aforementioned 100 million. So the second feature of this second quarter is continuing progress as far as PCAM is concerned.

On the alternative effort side, we have a further reduction. As you can see here, the Telecolumbus transaction closed in the--on July the 2nd, giving us a further reduction in private equity by about--by about 400 million. I have mentioned Telecolumbus and here I have to make a confession because I was asked in the analyst's call in April whether I believed that after the write-down, which we had--which we had done by the end of last--at first quarter last year and then in the second quarter, whether I expected an additional write-down on an additional loss on our investment of Telecolumbus and my answer at that point was, "No, I don't expect one", and this was to the best of my knowledge. But now I have to confess we had to take another hit in the second quarter of 79 million so please forgive me. And this is the result of two factors; the purchase agreement which we had also--a factor which was performance related or related to the performance of Telecolumbus in the first five to six months and that performance then came in below our expectation. And secondly, the final due diligence then led to a decline of the net asset value, lower net asset values, so this also needed to be reflected. Those are the two factors which determined this charge and if you want to have the precise number it was 79 million. So Telecolumbus was a very bad investment for us.

This slide shows you our listed holdings, industrial holdings and the EGB Euro Bank. You will recall that we had to take an impairment charge after the first quarter of roughly 400 million on those positions, but as you can see here, we have more than fully recovered this impairment charge and, as a matter of fact, on the basis of yesterday's stock price, this total unrealized gain would be, instead of 631, is a billion. So we clearly--we clearly benefited from the market recovery.

Next, and capital--and capital management. Our problem loans have come--have further come down to now 8.4 billion. This has been for us the first quarter after seven quarters in which charge-offs came in below our provisions for loan losses. I explained this in prior quarters to you that there was a catch-up as U.S. GAAP practices and I told you the last time--I told you the last time that we are now basically done with this catch-up, so and I'm now pleased to report that for the first time within two years, the charge-offs are, that I said before, are below.

As of this hour, the , the coverage ratio, a ratio you attached wide a lot of importance to has gone up to 46%.

Risk provisions, as I said in my introductory remarks has come down for the third consecutive quarter, but those risk provisions are still high and are still below our longer term, our longer term average. While we have witnessed some improvement, the global credit environment, the situation in Germany is still challenging, and therefore, our provisions for credit losses in Germany in the first half of this year has slightly gone up, while our provisions for our non-German loan portfolio have come down.

So the decline, our international loan portfolio of credit losses, provisions for our international loan portfolio have more than compensated for the slight increase, which we have experienced in Germany.

Our loan book, again, has further come down to now 165 billion. I talked several times about hedging. We have hedged our, a part of our loan portfolio in developed markets, and in emerging markets, total number of that loan, which is basically our international loan portfolio, if you will, is 36 billion of which we have, now hedged 7.3, seven times three billion and those hedges on the 7.3 billon, then resulted in this mark-to-market loss, in the mark-to-market loss on the hedges.

We still do believe, note we are absolutely convinced that this strategy is absolutely right. This strategy is dictated by consideration, and from a timing point of view, you always can do better, but if you look at the development of the credit in the last six, 12 months, say, I do believe you know we will either to small to small, and stupid, so in a way, I guess it will probably, it was probably done.

Our tier one ratio further improved, as a result of further decline in risk rated assets, and an increased in our regulated capital to 10 percent. This is a very strong number and is clearly over and above our target range, which is between eight and nine, eight and nine percent.

But I now have to, so that's very good, and we are very pleased by this , by this number, because it shows the result of all our work, and our good pressure is here, that the value of our work to improve our Tier one ratio.

But as always, the FASB, the standard setting board in the U.S. always thinks about using, how they can make accounting more complicated, so they come out with FAS 150. FAS 150's explained in the training, in our training on page 188.

What it means -- it becomes effective or it became effective July 1st. What does it mean to us? You know, we, as part of our equity compensation scheme, we have restricted equity units which employees get after a vesting period, say three years. That is part of our bonus compensation for our -- for our employees to -- as a retention -- as a retention tool.

We hedge our obligation to deliver to the employees those shares, say in three years, from now to the forward. And under FAS-150 this forward has to be taken into consideration either in the balance sheet or the P&L. And if -- now, those are the technicalities. If you allow the forward to be settled in cash or in shares, it's treated like a derivative so mark-to-market on a daily -- on a daily basis resulting in P&L volatility and resulting in potential gains or losses in your P&L's. This is clearly not the intention of this scheme. The intention is to protect -- to hedge our obligation to our employees to deliver shares going forward.

The other alternative is if you select only physical delivery, it is considered, you know, as an obligation to buy your own shares and you know that obligation then becomes due, say three years from now, you have to take it or treat it as if you had bought them already. That means you have to deduct this from equity. This is an explanation that one can understand, it's not the technical explanation how an accountant would explain it to you, but that's the substance of it.

And after deliberate consideration, we have decided that we don't want to have this P&L volatility because this is very difficult to understand for everybody so we take the hit to our equity and this is an event in the third quarter. However, we clearly are working to mitigate the impact -- to mitigate the impact of FAS-150 on our Tier 1 ratio. And this is very important for you to know, we are working on this because there was some speculation this morning that the effect of FAS-150 would be to -- to -- virtually fully reduce our ability to buy back some of our stock if opportunities arise. And we don't have plans, as I can tell you, but with our -- with our measures which we are going to take, we will preserve our ability to buy stock when appropriate.

So far on credit risk and capital management, let me just summarize. We have clearly continued to deliver on our phase 1. We clearly have demonstrated the effect of the transformation of this -- of this bank. Our cost discipline is clearly intact when the numbers are properly analyzed. We continue with our rigorous management of risk and capital. And clearly the highlight of this second quarter - of those second-quarter results is the impressive performance by sales and trading gaining world market leadership and the consistent progress of our PCAM operation.

And we are well positioned to deliver now on phase two, which is, again, before management agenda. And the focus of this phase two is clearly on customer, on revenue growth, but at the same time, maintaining our strict cost capital and risk discipline.

And this concludes my discussion. Thank you very much for your attention, and I'm more than pleased to answer any question you may have.

Yes, thank you, Clemens, for the presentation, and we are ready to take your questions. In the interest of the virtual audience, we have microphones in the room. Maybe we'll start here with and then maybe Mr. ? Second - the second row.

Now I have to . This was a comparison - the second quarter with the first quarter. So, it's a - it's a delta, and what I said is that higher bonus accruals, higher bank loans exit costs, entire PBC reengineering together accounted for roughly 400 million. So, that is 400 million more than what we had in the - in the first quarter. That was charged to allow a better comparison second quarter versus first quarter.

OK, thank you. Perhaps the second question was concerning your sales and trading figures. If I look to, let's say, the fixed income side and also the equities side, in equities we saw a nice upturn - fixed income was rather stable. Could you tell us, please, just to understand the quality of these earnings, how much is really sales commission revenue business here and how much is, let's say, directional risk taking? Because I remember in the past years always the same 80/20 split, but I would assume that since your also increased in the second quarter that perhaps your risk appetite increased, too.

Yes, very good question and a very - a very important one. The performance is clearly the result of our - of us fully concentrating on customer - on customer flow business. And our - the increase of the is in line with - is in line with higher - with higher sales and trading revenues. That doesn't necessarily mean that the split which you mentioned increased. Our risk appetite is clearly - is clearly limited, and we haven't changed this risk appetite in the second quarter in a - in a significant way. So, it is still - it is - the cut difficult, but the cut between customer flow and proprietary trading is still in the range of 75 customer driven, 25 proprietary, which is a very good number. We have an internal slide which shows peer comparison of revenues and risk ; I cannot show this here because I cannot show you peer comparisons, but you can develop such a chart or comparison yourself and it shows that in terms of risks and revenues, we are one of the most, and I would presume the most efficient bank.

Perhaps one last question concerning your compensation figure of 2.8 billion. Could you give us perhaps a little bit more feeling really how variable this compensation base is? If you could--if you would see, let's say more difficult markets in fixed income, let's assume a drop of 10 percent perhaps on the revenue side, how flexible would be your cost space, just to get feeling on the elasticity here.

I guess we have demonstrated now in the second quarter that we can increase our revenues very, very little incremental cost. If revenues declined, we clearly have room for adjustment. I mean, the first adjustment would be the bonus accrual because that is formula driven, based on performance, but we have become very effective in managing our cost base in line with our revenues.

Could you give us perhaps a little bit more, let's say a feeling on the figures, assuming at what level of revenue drop would you not be able basically to compensate that by slashing bonuses?

I have not made this calculation, quite frankly, because I guess in the current--in the current environment, we don't have to develop contingency plans for crisis scenarios, therefore, any number I would give you now would be in a little bit out of the blue. But I do believe, and I really do believe that the performance which we have shown on the cost fund for the last 15 months speaks for itself and also demonstrates our ability to manage our costs and to synchronize our costs with revenues. And for example, despite this revenue--the shift in the revenue mix to more sales and trading, which requires a higher bonus than the other businesses, we have managed to keep our compensation ratio at 46 percent and this, I think, gives you an indication of how we are able to manage our cost space.

Next is Serghei Colours .

Yes, I have a question on the net new money outflow of 19 million. Could you please outline why there was this outflow in the institutional funds to this and in the corporate banking and securities division? And then a question on performance in prior asset management; if I deduct net new money outflow and I see in this division to try to match performance of 7.8 percent, while in institutional funds, mutual funds and private and business clients the performance is significantly below 4% in each area.

I mean the first, if you do a, could be a comparison, the money outflow is a feature, which is the also among our peers. And within this invested assets, you have also some, let me call short-term investments such as money market fund, and also cash positions as far as the call of the institutional investors are concerned and this money, clearly has a little bit, as they're trying to come in and to come, and to come out, if your money market funds or short-term bond funds are for better, higher yield than industry the money comes in, and if they have different views, how to invest that money, that money goes out.

So what I'm trying to say this month that we are lost market share, but this is the typical shift, which we see particularly this, in this kind of environment, but what has, has a bit more details than can give you more detail.

And trying to break up the 12 billion of the institutional fund outflow, roughly half of it was due to the Americas, partly have to do with outflows of money market funds. So the ones with not the highest margin and also the second largest portion was more in the Asian Pacific region or maybe this was a little bit of hint. And as far as private work management is concerned, I think you basically have answered the question already.

On the performance, the different performance, the different performance of private growth management, there was, when I strip out the net new money outflow and add to, this one billion for example, to the 165, I got 166. Is this is a performance of 7.8 percent, this is quite nice, and I would say a little bit better than I would have expected, given the market's development in the other area, especially in mutual funds is rather disappointing.

And, we should have highlighted this is a result of the acquisition of this bank in Switzerland.

You didn't account the acquisition at net new inflow.

No we didn't account it as net new money, I mean that would be wrong, so therefore the increase in the second quarter of 12 billion, this is not net new money entirely, nor is it the performance, but it is the effect, it is the effect of, the effect of the acquisition of .

around seven.

Pardon, could you repeat?

Was it around 730?

I mean it's and it's performance movement, both, net new money and ...

Seven billion was with it.

I didn't get it.

The effect, you mentioned the number of seven billion, that seven billion has as a unit, Swiss franc. This is euros divided 1.5 and you actually get to four point something. That's in euros.

Then I have another question in the PCAM Division in its private business clients has a strong increase in other revenues. This is a very volatile number. Normally, our interest.

I mean -- I mean, we have had this discussion about our revenues and their consistency in PCAM many times -- many times here and I have always referred to that part -- that part of the business. I mean, this number can go down a little bit going forward but it's never been zero. I mean, you can average out over all the quarters which we have provided for you. But there's nothing special in this. There's nothing special worth mentioning in the second quarter.

OK, maybe we could give the microphone one line behind to Philip Tichon . OK.

Philip Tichon from UBS. Two question if I may. First with respect to the exposure management group and the credit derivatives. You mentioned that 7.3 billion of international loan are already hedged and could you comment on the target and also on a potential mid-term impact to your normalized loan loss provision charge too that increased hedging effort?

And, secondly, with respect to your line, debt and other products, sales and trading, could you comment or give an indication for ex contributed to that? Thank you.

Loan exposure management group. The loan exposure management group has become effective on July 1st so there's nothing in those numbers as a result of the loan exposure management group. The loan exposure management group or their -- what is their mission? It is we do market pricing of our -- of new loans and that market pricing then allows us to hedge our position at market -- at market rates. And in fact, we do this for our international loan portfolio and not for the German -- not for the German middleschstand among others for obvious reasons.

The level of hedging of the -- I mean, I cannot comment on this. Number one, you know, this is an event in the future and I would also say, this is, you know, what, at the point in time, market conditions suggest and what we think is an appropriate or good level -- a good level of hedging. The idea of this new approach is to reduce, at first to do a proper pricing and if you subsidize a loan that you are fully aware about the amount which you subsidize the loan. And secondly, that's very important to reduce the P&L volatility because if you look at our credit losses in the last year, you do see an enormous volatility which is not very much appreciated by the markets. So the objective is reduce the volatility of the P&L.

As far as the loan hedge concerns I talked about, this is hedging our full portfolio. This is hedging the portfolio before LEMG , and the idea here is also to reduce the volatility and we concentrate particularly on concentration risks because we have figured out particularly last year for - or last year we were particularly hit by these few incidents. I told you that 60% of this very high specific loan loss provisions came from only - from only 20 names. So, we have to distinguish between our new approach going forward which is LEMG and the - our traditional approach now being modified, if you will, by more hedging our concentration risk and where we do think it's appropriate, given the pricing of a hedge in the market.

Yes, your second question was Forex as a percent of - as a percent of the revenues of a - in other markets. Is this a - is this a number which we disclosed?

Let me say this. I always talk about the diversified product portfolio within this debt and other products. We have basically ten product lines in that - in that product - or in that category. We don't have concentration risk. And forwards - we don't have concentration risk and forwards is not the largest of those ten product lines.

Thank you. And now it's up to your .

Are there still questions left? Otherwise I suggest we go to the other wing because so far we have to be . Can somebody give a microphone in the middle - in the middle to Michel Klein perhaps?

Yes?

Thank you. I have a question regarding your new disclosure of the trading revenues and net interest income. When I take out the division with investment banking, there you have total revenues in sales and trading regarding equity of 903 million in the second quarter. And you disclosed a net interests and trading revenue of 700 - ...

Which page are you ...

Nineteen - page 19 in the presentation.

Yes?

So in a division of CIB you made in total sense trading in equity 903 million total revenues.

Yes?

And thereof is 772 net interest and trading revenues. If I deduct this figure, I come out with a remaining revenue of 131 that commission income mainly. So, from that point of view I am wondering that you have shown in Q1 and Q2 a very low commission income of 90,131,000 compared with more like 300 million in the quarter - in the previous quarters. So, what is the main reason for that strong reduction in commission income?

No, no, not a strong reduction. We had total in the first quarter 594 and interest and trading was 504, so there was around 90 million in commission.

In the second quarter we have 903 minus 772 is 131.

Yes, but in 2002, you had to run about 300 million in revenues, so from that perspective it is a very strong decline.

I know, I know. And this is the result of the slow cash equity market, particularly in the U.S.

What brokerage business?

Hm?

Cash equity is a brokerage business.

The cash equity business--the cash equity business, as we all know, was a very, very slow business in the first quarter of this year and also still a challenging for--the second quarter was also a challenging quarter. But you have really figured out there was a shift in revenue sources and that shift in revenue sources is--or the explanation is the slow cash equity market, particularly in the U.S.

So the current figures of 19 and 131 million is more reliable for the future than, let's say 300 million.

I mean, this clearly depends upon--depends upon the market--the market development, and I mean markets will eventually--they'll eventually recover, cash markets, they'll recover, and then this number will--this number will go up. But I must say we have now provided to you, which is I think a major achievement, a full reconciliation of the revenue categories in the group here now. This, the segment--there's a segmental revenue breakdown by business line. This was meant to provide to you more transparency. I guess this full reconciliation, at least it's an achievement as far as accounting is concerned, but I don't--the intention was not to create more problems for you, to have more numbers which you then want to know what is the going rate and what is the going rate going forward. I mean, the more you go into the details, the more volatility you see, but overall, then, there is a quite smoothing effect.

OK.

But your--your question was absolutely right and the answer is that slowed cash equity market in the U.S. had an impact and if you look at the disclosure of our U.S. peers, the reason why their equity revenues are pretty low, or have come down--I should be fair--have come down is that the U.S. cash equity market is very subdued.

Thank you.

OK. Can I have a clear hand who wants to raise a question? Maybe in the first row, Peter Hine , and then we start and Dania , and then we go over there, right? OK, thanks.

I would like to ask four short questions. Firstly, you explained to us that one of the effects of this new . Are these permanent effects as well, and could you give us a figure there how big it could be? Secondly, could you tell us impact of the dividend payments in second quarter for interest income? Third question, why did you adjust the loss of 100 million from the loan hedge at your underlying profit? And fourth question, you told us something regarding the U.S. FAS 150 rule, which take effect from the first of July to give us a feeling how big the could be, could you give us maybe a figure what would happen at Deutsche Bank equity funds if you have to adopt it from the first of January or from the first of April? Thank you.

Yes, I answered this question a little bit a different order. Loss on loan hedge, I have not taken out of underlying. The loss on the loan hedge is included on the line, because this is part, clearly part of our business. But it is something, which also is industry practiced to disclose the effect of the mark-to-market change of those, of those hedges. I mean, this is still resolved of FAS 133 or IS 39 that the change in value of the underlying, which in this case is the loan portfolio, must not be reflected in the P&L about the mark-to-market change of the hedge, has to be reflected in the P&L's. This is an asymmetric, if you will, an asymmetric accounting.

So this has not been taken out the P&L, but those going forward always highlight what the impact, of this, from accounting point of view, imperfect hedges.

What I have taken out of the underlying is the loss on the hedge on our industrial holding portfolio. This has been the practice introduction of IS 39 in the first quarter '01, and I've always highlight what the effect of that hedge, of that hedge is.

(Speaking German).

It's hard, for me, it's a bit hard to say what's the ongoing effect is, but I can say is that the text charge, which we and once again, it's not a cash tax expenses, I guess I said this before, it's a deferred tax liability, if you will on a timing difference.

It's predominantly effect. So the ongoing effect is rather small.

On dividends, I mean, I have to provide more and more details, the effect is about say in the range of around 200, and he has fast impact on 150, I must say I'm not in a position to answer that question, because we are, as I said before, we are working on factors to mitigate the effects, and if FAS 150 has become effective generally at the first, I don't know what kind of measures we would have taken last year to mitigate the impact, and the good news, introduced you have quite some time, you have quite some time to adjust.

You also should take into consideration there are a variety effect of impacting, impacting the tier one ratio. I mean that's not to say, this is clearly almost rocket science and therefore we never make forward-looking statements on the tier ratio, because there are so many factors being considered, returned earnings in the quarter, which is pre-tax you have to predict. You have to predict the tax rate and then you have the current -- the currency has an effect, the risk has an effect and the currency has also an effect on -- the currency has always effect on the risk . And I can only confirm what we have consistently said that it is our target to keep the Tier 1 ratio in the range of 8 to 9 percent with a bias towards the upper end of the scale.

Only follow up question regarding this 150 new rule. Do you think it could be a very small impact or a bigger impact to give us some feeling?

What is small?

Below half a billion.

No, no. The impact -- the impact is much higher. The impact is much higher. The impact is much higher. It's disclosed. You find it in the interim.

You'll find the number in the interim report. It's in the notes.

I have no problem it's 2.9 billion. 50 million shares.

Next is David Williams.

Thank you. I have three questions. One, change accounting standards. The other change that's taken place is the consolidation of special process entities. Could you just tell us what you expect the impact of that will be going forward? And, second, on the bonus call in the compensation to revenue, 46 percent in Q1 and Q2 is actually lower than any quarter in 2002. Given the fact you say it's formula driven and you've had a business mix changed towards sales and trading can you explain why that's actually gone down in the current quarter versus 2002?

And the third question is on the fixed income market. Since the start of July the bond yields have backed up considerably. The U.S. Bond yield's up 100 basis points. Looking at your Q2 number, the net interest income in trading result was down 9 percent Q on Q. I just wonder if you could give us some idea of the sensitivity of fixed income revenues to our increase in bond yields? Thank you.

Special process entities, we discussed this in the trainef . We gave an indicative number of 45 billion. I heard from financial accounting before I came up to this conference that the number would be -- would be somewhat lower than the 45 billion. So -- but I guess I'm not in a position to give a firm number here. But our current expectation is that it will be -- be the lower -- a lower number. Once again, the effect is to expand the balance sheet but it has no impact upon -- upon our Tier 1 -- upon our Tier 1 ratio.

On the bonus side, the answer isn't difficult. This is the result of our headcount reduction effort and the other component of compensation is salaries and benefits and other compensation elements clearly -- clearly -- clearly have come down and, I mean, it's a good question for me because it gives me the opportunity to exactly -- to discuss, again, that we have saved on the compensation front and we have been able to reduce the comp, the non-bonus comp to an extent to fully compensate, in a good quarter -- in a good quarter for higher -- for higher bonus -- for higher bonus, if you will.

Your third question, I can only repeat our revenues in sales and trading debt and other products are not correlated with the level of the interest - of the interest rate. And we have demonstrated in environment of high interest rates and low interest rates and middle interest rates that we can generate consistent revenues. This is a message we really try to get - to get across. What we like is volatility. What we like is change in . And we like all sorts of changes.

next question. Can we have a microphone here in the ?

Yes, from UBS. One of your domestic peers reported a fairly material improvement in net interest margins in the second quarter this morning. We guess that has to do with also improving asset pricing within Germany. Does that - is that something that you've experienced and does that in any way change your caution on extending credit both domestically?

Yes, I mean we haven't - I just double checked what we have said so far - so far on the - on the interest - on the interest margin. As far as the question you know what about your German - your German mid-cap - your German mid-cap portfolio, we continue to make progress as far as the interest rate - the interest margin is concerned. I'd say not dramatically, but we are making - but we are making progress.

I cannot comment on the disclosure of other banks, but I do know if the interest rate margin changes - the NIM , if you will. It's in most cases the result of the shift in the composition of the loan portfolio. so from high - no, from, let's say consumer finance. Then, in an improvement - in an improvement of the inverse margin. And from the disclosure which we have provided here, you can also see if you take our total net interest revenues how "little" comes from loan products both in CIB and PCAM.

So, the net interest revenue line clearly is not indicative that the interest margins go up or margins go down.

Just following, so on your domestic loan book, is there any change in your appetite for domestic lending?

Not really. I mean what we have said - we are still, of course, available for counter-parties with a good credit quality - there's absolutely no question about this - at an appropriate price. And I mean we have never had a different strategy in this regard. But as we all know, given the current economic environment, the demand by those companies is rather limited as a result of the current economic environment.

And Esther , can you hand the microphone in the row in front of you, right in front of you, Derek Chambers.

You've made quite good progress in reducing non-performing loans and you pointed out that the charge-off rate has now declined. So that can't be just because you're writing off non-performing loans. Could you explain or give a bit more explanation of where that improvement in non-performing loans has occurred and would you be able to say whether the same has happened in the German portfolio as in the international portfolio?

Thank you for this question because I should have mentioned when I presented the respective slide to you that the decline in problem loans this year here is not just the result of charge-offs, but is a true, real decline, and so--and by 900 million; 400 million--up 400 million in the first quarter and up 500 in the second quarter. And this is a result of our successful endeavors; that is credit risk management to restructure loans to help counter-parties to restructure their loans and to get them back on track. It's also the result of an improved--of an improved, as I said, slightly improved credit environment globally. The bulk of this net reduction of 900 million is our--relates to our international portfolio. The reduction.

Do we have any remaining questions left in the room? Oh, yes, here; sorry.

I would like to ask two questions. Number one is regarding severance payments. Is the second quarter a run rate and for how long? And the second question is regarding our diluted number of shares. There is a five percent difference at the end of the second quarter, whereas there was really no difference or no dilution effect at the end of the first quarter. What's the reason for the increase and what do you expect the dilution to be going forward for the rest of the year?

Most difficult question. The first question is a bit difficult because it implies forward-looking statements and you--and you know my attitude in this regard. We had--let me first explain what is behind those severance payments. We had severance payments of 200 million which is clearly a very high number. You go back, our run rate used to be about 50 million a quarter. The difference from 50 million to this 200 million relates first, PBC and secondly, . In PBC, they have talked several times with you about our restructuring program and that the accounting standard does not permit us to book a restructuring provision that we have to pay for that restructuring on a pay-as-you-go basis.

And therefore, what you see in PBC, what you see at severance here is basically the comp part of the restructuring. This restructuring will be as we said before, they'll be completed, they'll be completed by the end of this, by the end of this year.

Then we have and in we had severance of about, in the second quarter, I guess it was 54, 54 million. With we are mostly done.

So you multiple the 200 million by four, the 200 million and you ask me is that on the high side, I would say yes. If you said, I take the number of the first half, which is 319 and you multiply it by two, then I would say most probably you would not be too far off.

Is that good enough?

Just next to your neighbor.

We'll be happy to open this dilution issue.

Oh sorry.

Tony , why don't you say it in a nutshell, I mean.

The way you calculate, the way we calculate diluted shares is something called the modified treasury method. And under the modified treasury method, if you have convertible or options outstanding, what you do is you assume that the proceeds from the strike price will be used to repurchase shares. When you calculate the dilution, you add the number of option shares, reduced by several adjustments. One of those adjustments is the repurchase, the assumed repurchase of the shares with the exercise price. If the share price increases, the number of options in the strike price remain constant, but you're buying back fewer shares. It's a technical accounting, look at modified treasury method of calculating diluted shares and it'll be affected by the fluctuation of the share market.

Is that clear? Of course it is. Julian ?

Yes, one quick broad question and two specific questions. First on debt and , you comment that you have 10 business lines, could you just tell us from business line and what was the more contributor, we noticed that it was not .

Secondly, on the provision, to hedge your loan, we are to expect a lot of relative on the top line and what could be the way to reduce that for it to be more active on the trading side for the .

And last on , if I did that, would you say that the 1.3, 1.4 billion is a good target for the coming quarter? And if one of the main to balance the of the group, how to find more growth ? Thank you.

Yeah, why don't we start -- why don't we start with PCAM -- with PCAM first. I mean, at first, as you know, the 1.6 billion in operating cost saves in the second quarter. Once these re-engineering expenses are behind us, I mean, we get a relief from those re-engineering expenses, you know, which gets us below a billion five. However, the objective of the re-engineering expenses to benefit from once you stop with those re-engineering expenses to improve -- to improve the operating cost base. And therefore effective -- particularly effective next year, we will see the benefit of that -- of that restructuring. So this 1.6 billion technically, those come further down particularly in the next year.

There is a bit, the following effect, and again accounting makes life difficult as we all know. Once you agree with an employee a severance package, you have to account for the provision of -- you have to account for the expenses of that severance package even if the -- even if the person leaves the company say by the end of this year. And this is very much in Europe very often the case that you agree with a person a severance package but the guy or the person gets off the payroll at a later -- at a later date. In this regard, you are hit twice, once by the severance expenses and secondly that you continue for a certain period of time to pay him -- to pay him a salary. And that -- for that reason we are, right now, not seeing the benefit of those severance activities, if you will, which hit our P&L -- which have hit our P&L particularly in the second -- in the second -- in the second quarter.

The question about the impact of loan hedges on the -- on the P&L. This -- the loan hedge provides some volatility to the P&L topline -- topline and bottom line. There are two factors which drive that volatility. One is the movement in credit rates in general and then downgrades or upgrades of the particular kind of party.

Do we take advantage of market -- of market conditions? I will assume we do so. I mean, we are one of the leading banks when it comes to credit derivatives and I guess we will also, as far as our own loan is concerned, we also will take advantage of this -- the extra piece which exists. But the objective clearly is that the volatility for the hedge is lower than the volatility of the loan loss -- the loan loss provisions. So those two combined should be smoother and altogether -- altogether, hopefully -- hopefully lower. But we are now in a - in the phase of the introduction .

And you want to hear what the drivers - what the driver - the drivers in - the drivers were. Is that should I go that far? Which period compared with which period?

As of Q2 - as of Q2 ?

Oh, I don't have - I don't have that. I don't have - no, no, this is - Q2 '03 versus Q2 '02 . For example, that I can mention that you might pursue and that all that comes with it is what - which was something very - something very good for us and also emerging markets have been very good for us.

OK.

Julian is satisfied.

Can I have a hand if we missed any questions? Here's one .

Could you give us one or two examples of Deutsche Bank's domestic activities where this law has some material impact on?

We missed the last .

Yes, could you give us one or two examples for Deutsche Bank where this law has a material impact on Deutsche Bank's .

Where this law has material impact.

I mean when it comes to tax, I have a standard answer and usually and that is even a bank has its privacy and the tax is clearly the privacy. But we are impacted by two - by two aspects. One is on the tax fund as it changed as far as is concerned. We are impacted by this. And again, this is a - this is a deferred tax liability. There's not a cash item. And we are also impacted by a change in the law as far as the taxation of dividends is concerned or I should say, you know, the shift from the old regime to the new regime effective 2000 allowed us a certain relief of tax earnings. And that tax relief which basically results in a - in a tax credit is now discontinued for three years. Is that sufficiently technical so that no one could understand me?

OK.

OK. Good. I assume we have sufficiently all the questions raised. We very much appreciate your interest. We thank you for coming here to Frankfurt. For those of you who after the reporting season, of course, are heading for summer break, enjoy the time and we all hope to see you back for the third quarter call. And thank you, Clemens. Good-bye.