Deutsche Bank AG (DB) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Deutsche Bank Investor Relations Conference Call. [Operator's Instructions] I would now like to hand over to today's chairperson, Dr. Wolfram Schmitt.

Please go ahead sir and I will be standing by.

Yes, good morning.

Welcome to our second quarter earnings call.

Your host today is our CFO, Dr. Clemens Borsig.

I trust that by now you all will have read our earnings release we sent out this morning, which is supported by the usual financial data supplement.

And also, as usual, you can print from our website a Powerpoint presentation which will form the basis for this presentation.

After this presentation by Dr. Borsig, of course you will have sufficient time for your questions.

So, Clemens, will you please start.

Yes, thank you, Wolfram.

Good morning, ladies and gentlemen, also from my side.

First let me offer you a summary of Deutsche Bank's results in the second quarter of 2004.

This was a quarter in which we proved the enhanced strength of our platform.

Market conditions in our key businesses were tougher than ever this quarter for the same quarter 2003.

This environment had an impact on the revenues of Deutsche Bank and of other market leading firms.

Despite this, our profitability was robust and our return on equity was better than the same period last year.

Thanks to this performance, we delivered one of the strongest halves, first half performances in the history of Deutsche Bank.

In fact, on a comparable basis, our first half performance matched our record performance in the first half of 2000, under totally different and much better market conditions.

Let me now first sum up the results of the second quarter.

Net income before tax reversal was €749m, up 27% from the prior year period.

Diluted earnings per share rose 25% to €1.16.

Revenues were down 9% compared to the second quarter 2003, driven by market conditions in a few specific areas which I will discuss in a few moments.

As we shall see, declines in our top line were confined to a few product areas.

In other key areas, revenues have performed strongly and we have made market share gains both in key products and in key markets.

Despite lower revenues, we can report a rise in profitability, thanks in part to two factors.

First, the success of our cost containment program led to good progress on the operating cost base.

Second, continuing improvement in asset quality and an improving credit environment, allowed us to make further progress on problem loans.

And to report a reduction in provision for credit losses for the seventh consecutive quarter.

We can also report a year-on-year improvement in pre-tax returns on average active equity from 15% last year to 18%.

This was driven by tight capital discipline, in particular the successful completion of our second share buyback program at the end of the second quarter.

I will discuss both these factors in more detail on this call.

Turning to the half year results, first and foremost, our net income before tax reversal was €1.7b, up by €3b compared to last year.

This is an outstanding half year result for us, higher by €100m than the full year 2003.

Earnings per share of €2.83 were up by nearly 400% on the same period 2003, and revenues up by 6%.

Our pre-tax return on average equity rose from 9% last year to 21% These results demonstrate clearly that the transformation strategy of the last two years has delivered significant results.

This is particularly encouraging in our private and business client business, which is well on track to deliver on its demanding target - its half year underlying pre-tax profit of €500m.

I will discuss that business in more detail in a few moments.

So for the summing up, let me know turn to the Group results.

Slide 5 gives you a condensed income statement - it is more reference.

I will discuss all these numbers in more detail.

So let me know turn to page 6 which shows you our revenue performance on an underlying basis.

Firstly, let me say that again the shift in exchange rates had an impact on our-- on the year-on-year comparisons, as for example the euro appreciated on average in the second-- the second quarter 2004 compared to the second quarter 2003 by roughly 6%.

First here, our underlying pre-tax profit.

I think given the difficult market conditions, a very robust result, compared the second quarter with the-- this year with the second quarter last year.

Once again, when comparing our second quarter with the first quarter 2004, I have to mention the seasonality of our business.

Last year was an exceptional year in this regard for us.

This first quarter always is strongest-- is our strongest quarter.

On a half year basis, underlying pre-tax profits increased by 15% to €2.5b - this is equivalent of 17% of last year's total.

As you can see on the following page, and as I discussed, pre-tax profit was variable but the declines here - these underlying pre-tax profit by €92m was more than compensated by an increase in PCAM's pre-tax profit by €108m.

CI's underlying pre-tax profit improved by €97m.

In a few moments I will discuss the development of the business segments in more detail, so let me explain here the significant negative movement of €222m you can see in Consolidation and Adjustments.

I want to highlight here two factors.

Firstly, Consolidation and Adjustments benefited in last year's second quarter from an asymmetrical accounting treatment for positions in the bank's own stock.

This benefit did not repeat in the second quarter 2004.

This effect contributed approximately 50% of the overall movement within Consolidation and Adjustments.

The second factor was negative impact by mark-to-market versus accrual differences, in context of the hedging of debt issued by the Group.

As I explained in previous quarters, some of these hedges do not qualify for hedge accounting under FRIS 133, although they are complete economically effective.

This FRIS 133 effect contributed positively to Consolidation and Adjustments in the second quarter 2003.

In the second quarter 2004, with interest rates rising, the effect impacted Consolidation and Adjustments negatively.

Let me now draw your attention on the following page to the development of underlying revenues.

As you can see on this page, underlying revenues were €5.3b in the second quarter 2004 - a decline of 10%, when adjusted for the shift in exchange rate compared to the second quarter last year and the first quarter of this year.

As a result, revenues for the six months of 2004 were marginally down on last year, although marginally up when adjusted for the impact of ForEX and deconsolidations.

As you know, the sales and trading environment in the second quarter this year was marginally less favorable than the first, due to several factors.

We experienced lower levels of primary issuance, both in bonds and in equities.

Markets also responded to a rise in interest rates, political uncertainty, sustained upwards pressure on the oil price, and the widening of credit spreads.

All of our peers made reference to these factors in reporting their results.

As we will see in a moment, the decline in revenues at Deutsche Bank was limited to specific products in the sales and trading area - in particular in convertible-- convertibles trading.

Other key product areas witnessed close and gains in market share in the second quarter.

Page 9 analyzes now the impact of lower revenues in this context.

Consolidation and Adjustments, together with the impact of deconsolidations and forwards movements accounted for €300m of the decline.

The specific market impact trading business, such as our convertibles business and DB Advisor - our in-house structured trading business - accounted for a decline over the prior year period of €615m.

However, growth momentum in other areas, including other sales and trading products, origination and advisory, resulted in gains of €205m.

In addition, strict cost discipline and risk discipline delivered €600m of bottom line improvement.

As a result, underlying profits were very close to the levels of the second quarter last year, despite a significantly more challenging business environment.

The following page gives you a selection of our core products - 10 products which account for about 31% of our Group revenues - showed very strong growth in the second quarter 2004 compared with the second quarter 2003.

Let me now turn to costs.

As you see, our operating cost base declined substantially compared with those prior and previous year quarters.

And now we have the lowest level - it is €4.1b.

We have the lowest level in operating costs on a quarterly basis since the start of the cost containment program.

I would like to mention that in our non-comp expenses in the first half, this includes-- this number includes around €110m vacant space charge which I would describe as a one-off.

On page 12, I would like to draw your attention to the development of underlying return on average equity of our most important target ratio.

In the second quarter 2004, as already mentioned, in a much more challenging market environment underlying ROE came down 18% but was still above any quarter of the previous year.

Again, this reflects our improved profitability and also the success of our share buyback programs.

As you can see, underlying return on equity rose for the half year from 15% to 20%, and on a pre-tax-- and on a reported basis to 21%, as I mentioned before, which demonstrates solid progress towards our 25% target.

For the underlying profit margin and the underlying equity turnover, the same pattern repeats itself, i.e., it is slightly down from the first quarter 2004 but substantial progress compared to last year.

The following page provides the development of our cost income ratio.

As you can see, the cost income ratio in both quarters of 2004 remained below the average of 2003.

It increased slightly in the second quarterly this year because of the aforementioned revenue declines.

As to the component of the cost income ratio, firstly the compensation ratio was in both quarters of 2004 higher than in the corresponding quarters of the previous year.

This reflects our increased profitability.

Secondly, the non-compensation ratio increased slightly as it reacts not as elastic to revenue development as the compensation ratio.

As we make progress with our out and smart sourcing initiatives, you will see shifts from compensation costs to non-compensation costs.

However, compared to the average of 2003, non-comp ratio remains stable.

So for the Group results and let me know turn to the segments results.

Page 15 gives you an overview over net revenues and income before income taxes for our various business segments.

I will discuss those segments in detail now.

On that page I just want to draw your attention to Corporate Banking and Securities.

Here you can see that a revenue swing of more than €400m from second-- negative €400m from the second quarter 2004 compared to the second quarter 2003, resulted only in a pre-tax swing of less than €100m.

That shows you our increased operating strength.

Let me turn to page 16, underlying-- As you can see here, underlying pre-tax profit of CIB was down 11% compared to the prior year.

With revenues coming down cost income ratio, of course, went up.

However, underlying pre-tax return on equity in the second quarter 2004 remained above the average 2003 level.

In the first half 2004, underlying revenues were done 2% compared to the fist half of 2003.

However, adjusted for ForEX and deconsolidation, revenues were up by 3%.

The operating profits came down 4% but was slightly up in the first half 2004 compared to the first half 2003.

As I mentioned before, this was driven by a call for performance-based compensation in light of the stronger performance.

In the first half 2004, underlying pre-tax profit was up by 6% compared to the first half of 2003.

As we will see in a minute, the revenue decline was driven by specific area sales and trading but other areas performed well.

Let me now turn first to equities.

Most of our competitors have now commented on the very challenging environment in the convertibles market, where volatilities remained at historically very low levels against a backdrop of rising interest rates.

In line with major peers, our sales and trading revenues were significantly impacted by these market conditions.

The difficult situation of convertible markets also negatively impacted the result of DB Advisors, our in-house structured trading business.

However, revenue declines were highly localized to these two businesses.

Other customer-driven businesses performed very well compared to the first quarter 2004, as well as compared to the second quarter 2003.

This holds true for cash and program trading business, prime services as well as for the equity derivatives business.

In emerging markets, businesses performed especially strong in the key Asian markets.

In sales and trading, debt and other products, revenues were very resilient compared to the second quarter 2003.

A year ago I mentioned that the second quarter in this business was exceptionally strong for a variety-- for a variety of factors.

So a mild decline by 4% on a [four structured] basis is a very-- represents a very strong performance of this business.

I also would like to reiterate what I have said so many times before, and also what the Global Head of Global Markets, [indiscernible], also repeatedly says, refers to - that is the seasonality of the fixed income business.

The first quarter in this business is always the strongest-- is always has the strongest quarter.

So our performance in the second quarter is a strong-- is a strong performance when taking-- when taking into account the seasonality of the business.

On the highlights you see that market conditions were difficult in volume and flow products.

However, we showed impressive performance and market share gains in higher value customers - products such as structured credit, securitized products and structured interest rate derivatives.

We also continued to benefit from our very strong geographic diversity.

Let me turn now to origination and advisory, where we achieved our best revenues for the last six quarters, with an increase of 11% compared to the second quarter of 2003, and an increase of 3% compared to the first quarter this year.

In origination equity, as we all know, issuance volumes declined in the first quarter 2004 substantially.

We performed very well in Europe, Middle East and Asia, and we consolidated market share gains in Asia.

Origination debt, again we were confronted with-- we were confronted with difficult market conditions, lower issuance volumes in investment grade bonds, both in Europe as well as in the US.

We reinforced our clean number one position in European high yield, and we rose to number in European leveraged loan market.

In advisory we made market share gains-- we achieved market shares gain in Americas and in Europe, and we further consolidated our position in Germany.

On page 21, the summary for PCAM.

PCAM profits grew substantially versus 2003.

Second quarter 2004 underlying grew by 40% to €380m, and in the first half of 2004 underlying pre-tax Group at 58% to €790m.

The level of profitability in 2004 is now running at over €100m per quarter over above the 2003 quarterly average, and return on equity is now consistently above the 2003 levels.

PBC's profitability is a direct result of the completion of our re-engineering efforts in 2003 and 2002.

Both asset management and private wealth management recorded in quarter- in second quarter2004 profit improvements in key areas.

Let me now give you a little more detail, first on invested assets.

In private wealth management, we had a net inflow of €1b in the quarter, and also in our absolute return strategy area hedge fund €1b.

However, in institutional we saw a net money outflow of €5b.

This reflects in-- a change in strategy of our UK clients away from large balance portfolios to specific added strategies.

The decline of €2b, of the money outflow of €2b in retail, results from a change in our distribution model in the US, Discover, away from direct distribution to a third party wire house model, which gives us much lower distribution cost.

The net outflow of €1b in real estate funds results from the planned liquidation in the [morph] portfolio which we launched just last year.

The proceeds are being used to deleverage the portfolio.

Page 24 - you can see in asset wealth management half year profits are significantly ahead of 2003.

In asset management the German business performed successfully both on the retail as well as on the institutional front.

In North America we saw profit improvement after the Discover integration efforts.

Also in Europe, our UK business was negatively impacted by a shift in the institutional markets away from large balance mandates - a development which I mentioned a moment ago.

PWMs grew revenues successfully in the second quarter 2004, driven by higher invested asset levels generated by net new money inflows.

On page 25, as you see-- as you know CI's results includes dividends from [Bahmler] Chrysler and other holdings paid in the second quarter of the year.

So it was the same this year as last year.

In the second quarter 2004, we further reduced our exposure to private equity investments by around roughly €400m.

At the same time we also reduced, or by doing so, we also reduced our under fund-- unfunded commitments by another €300m.

Total alternative investments now stand at €2.3b, a 56% reduction compared with the end of the second quarter 2003.

The improvement in the bottom in the second quarter 2004 also reflected lower funding and hedging cost, which more than offset the decline in gains from securities available for sale.

We communicated clearly our intention to derisk the Bank, with successful reduction around CI's exposure indicates the progress we have made.

I apologize - I skipped page 23, PBC, but I would really like to draw your attention to page 23, as it shows the success for the engineering efforts in PBC.

As you can see here, a very consistent performance in the second quarter, and in the first half PBC is very well on track to deliver on its demanding target of €1b bottom line for 2004.

So far on the segment and let me now conclude my presentation by talking about risk and capital management.

As I said in my introductory remarks, we have continued loan book discipline, particularly in the area with corporate-- with corporate clients.

So our loans have come marginally down to €145b.

On the provisions fund we saw the seventh quarter of declining risk provisions.

We benefited from an improved quality of our loan book; an improved credit environment, particularly outside Germany.

We also improved from our [graduate] management, in the sense that we had some gains on the-- in some recoveries.

These recoveries clearly impacted our provisions in the second quarter.

So I guess we have now achieved a level of quarterly risk credit costs, which is very hard to beat on going forward basis.

On page 29 you see that we made further progress on the reduction of our problem loans.

We are now down below €6b, coverage ratio is 48%.

Our target is to bring problem loans further down during the course of this year and to increase the coverage ratio to around 50%

Page 30 - the Tier bond ratio remains comfortable above target range, which is 8-9%.

The decline is the result of our stock repurchase program in the second quarter which I mentioned before.

Without the stock repurchase program, our Tier 1 ratio would have increased to 10.3%.

And page 31 gives you the detail on our share buyback program in the second quarter of 2004.

As we announced, buy backs will continue after the approval by the AGM, early June.

We have now the capacity-- we still have the capacity to buy back around 45m shares.

As you know, selected employees have received Deutsche Bank shares in the context of share-based compensation packages.

Every year, at the beginning of August, these employees are free to dispose of a part of these shares.

This year the number of shares that will be free for disposal will number approximately 7.5m shares.

It is to be expected that some employee will sell a portion of their shares for tax withholding purposes.

These sales will, however, take place over a couple of days.

This concludes my presentation and I now welcome any questions you may have.

[Operator's Instructions] The first question for today comes from Jeremy Sigee from Citigroup in London Please go ahead with your question.

Thank you.

Jeremy Sigee from Citigroup.

Hi, Jeremy.

Could I just ask two questions?

Firstly-- well, in fact three.

Firstly, your slide on page 27 showed loans down 3%, or certain categories of loans down 3% but risk assets were up 2%.

I was just wondering if you could comment on which bits were growing and driving up the risk assets?

Secondly, you talked about the specific impact in Consolidation and Adjustments in the second quarter.

The item that had been a positive last year and has swung to a negative now in the second quarter.

Could you just - maybe you mentioned it - but, if not, could you just mention what the negative impact was in the second quarter?

So, not the swing year-on-year but just the negative drag in the second quarter of this year?

And then thirdly and finally, I just wondered if you could revisit-- come back to this favorite issues everyone's, about the accrual approach, the cost income accrual in corporate banking and securities.

Because at the first quarter stage there was this discussion and this suggestion that the accrual basis had changed and the cost income would be more flat through the year.

And, in fact, it has gone up again as in previous years.

I wondered if you could comment on that?

On the 3% on risk rated assets, basically this relates to an increase in-- resulting from an increase in market risks - the low translates into a risk rated-- in a RWA number.

And that is the effect.

On Consolidation and Adjustments, the biggest factor was a negative adjustment for mark-to-market to accrual accounting.

You know all our segment reporting is on full mark-to-market accounting and then the adjustment to accrual accounting, where required US GAAP explained in the recall column.

So this is the biggest portion.

The second portion relates to hedging costs for our stock compensation program and the third, as always, we have a few corporate items which we do not allocate out because they are not segment specific.

So this is always a little bit a constant noise level.

And those three factors basically contributed to the negative swing.

The fourth one, which is a smaller on, is the impact -it is a very small one is the impact of gains on own share and bonds.

So, and the third is, yes, the accrual approach.

As I explained the last time, the refinement was that we do have a clear model for our accruals in a full, strictly based upon the profit performance in the various areas, and a certain percentage.

And that percentage varies from business line to business line to reflect market conditions.

So this percentage then is accrued as, I think, is clear in the second quarter, the decline revenues and the decline in profitability occurred in areas with a higher bonus payout ratio, and that is the effect.

So does that answer your question?

Thank you.

The next question comes from Kian Obihusian from JP Morgan, London.

Please go ahead.

Yes, I have three questions.

First one is related on page 9 of your presentation.

I was wondering if you could give the specific trading product lines and the balance of other product, compared to the first quarter 2004 - the change relative to last quarter?

I mean - so that was your first question?

The next question.

The second question is related on page 17.

Could you give me an idea of the 32% decline in sales and trading equities?

How much is roughly related to convertible trading as well as to DB Advisor.

And what are the trends that are you seeing?

Has it a reversal?

Are you simply treat, especially the convertible business asset, not ongoing reduction going forward?

And the third question is related to your PCAM business.

If you annualize the first half, I am not getting close to €1.8b to €2b which is your target.

Just trying to understand what have to be the drivers for you to get to that-- to that figure?

Let me start with, let me start with PCAM first.

I mean, I guess I have to clarify-- I have to clarify the targets within PCAM.

As a clear target, PCAM [indicated] a €1b underlying pre-tax profit for PBC and, as you can see, with €499m after the six months, they are well on-- they are well on track.

We have not communicated targets.

We have not communicated clear targets for asset and wealth management.

What we have said was that asset and wealth management is going to become for us [€0.821b] underlying pre-tax profit business.

But we have never said that we would achieve this in 2004.

I also should say in this business you do have seasonality but, as you can see from the slide, the seasonality there is-- those profit in the second half are stronger than profits in the first half.

So one should not just extrapolate at the first half of the year to get to a full year number.

Last year asset and wealth management was at €555m.

They just achieved their [points] of last year.

They have-- in PCAM we have more than €1.5b and once again, Jo repeatedly said this is for-- between €1.5b and €2b, and we do want to get to a €2b over - but not this year - over a period of time.

Now, your other question related to convertible and DB Advisor.

I gave you indications now you want to have more.

We discussed repeatedly that we do not want to give product line details.

But what I can say is the decline-- the decline in revenues in DBS-- excuse me, in global equity, both compared to the first quarter as well as the to the second quarter 2003, relate almost entirely to a revenue decline in convertible and DB Advisor combined.

And your first question was?

Those specific trading areas.

I mentioned two of those, mainly convertibles and DB-- DB Advisor.

They make up about two-thirds of the decline, and the other component was, in fact, was our revenues in fixed income in emerging markets.

Last year in fixed income in the second quarter we had very, very strong revenues in emerging markets.

This year we had a reversal to the mean.

That is excellent.

Thank you very much.

The next question comes from [Alexander Blaine] from BGB.

Please go ahead.

Yes, good morning.

My first question would be whether you still stick to your overall 25% ROE target and for which year?

And if there-- if you would see any special measurements you would have to take in order to achieve this goal?

And then the second question, just a number question.

Could you quantify the amount of dividend payments received in the second quarter?

And the third question, do you have any comment on [UCOS]?

Has there been any special charge in loan loss provisions in the second quarter?

Thanks a lot.

On the 25% target, we have repeated our commitment to the 25% return on equity target several, many times, many times.

And part of my message in this call is, look how good progress we have made towards this target.

And we are at 21% and so the glass is by much more than half full in this regard.

As Jo has said in his letter to shareholders, we published - we set ourselves ambitious targets and we are highly-- and we are focusing on meeting these objectives.

So at this point in time there is absolutely no reason to decommit in anyway on the 25% target.

But we clearly set this target, our objective is to achieve this by end of 2005.

And if we are ambitious, we would like to achieve them earlier but that needs the co-operation of the market.

It is absolutely clear that markets have not co-operated very much in the second-- in the second quarter.

We are, as far as our activities are concerned, we are focused, clearly.

And given our commitment, you can assume that we will take any measure which is necessary to achieve those targets.

I also would like to say, a year ago we communicated our management agenda phase number one.

We are working on its implementation.

As you can see, we have very well maintained our discipline.

We are working on close initiatives and even if the second quarter masks a bit the result of those initiatives, I can only say that-- repeat what I have said, in certain areas we have achieved very good-- a very good [close], both in terms of product as well as in terms of regions-- in terms of the regions.

As every year we have now started our strategic planning process for 2005 and 2006, the targets for divisions clearly are compatible with our 25% targets.

And we are now discussing with the divisions their programs and their actions, which they intend to continue to implement to achieve the 25-- the 25% target.

And I can only express the confidence which Jo expressed in his letter.

On dividend received, €200m.

On UCOS, you understand that it is our policy that we do not comment on single clients:

Thanks.

May I ask an add-on on the first point.

When talking about, we will take any measures in order to achieve the target.

So we are talking about only about growth measures and not about any cost-cutting measures here?

Just to clarify this point.

Again, I can only repeat what I said, we will take all appropriate measures to make sure that we do achieve our 25% target.

You understand that, a, I consider this a clear message; b, I hope you understand that at this point in time I do not want to go beyond this statement.

Thanks a lot

The next question for today comes from Fiona Swaffield from Execution in London.

Please go ahead madam.

Hi, good morning.

Hi, Fiona.

Can I ask questions on three fronts, two of which may be related?

In CIB, in the appendices you basically give a non-compensation operating cost base, and that is obviously picked up a bit in the second quarter.

I just wanted to understand if that is because the first quarter was seasonally low or, is there anything to do with litigation?

Because you mention at the end of the press-- of the quarterly report about litigation.

Could you be a bit more specific - this is my second question - on litigation?

How-- what-- Could you give us any idea of provisions you have taken?

Or, if there are litigation expenses, if we will just see those going through the expense line, rather than you just saying that you would make a reserve?

And the third question is the VAR, the value at risk.

I was struggling to understand why it has gone up so much versus the end of Q1, given what happened to the trading and convertibles and DB Advisor.

Could just talk a bit about that?

Thanks.

Okay, let us-- let me start with the VAR.

Again, as we have repeatedly said, VAR is an important measure and an important figure to measure risk.

But it is not the only figure to measure risk and, in our view, it is even not the best measure-- measurement of risk.

We consider economic capital much more effective and, therefore, a better measurement for risk.

And I can only say that our economic capital in the sales and trading areas has gone up much less than our VAR.

The VAR increase is explained 50% by an increase in positions.

The other 50% comes from an equal share - comes 50% from the higher-- it is volatility-driven.

And the other 50% is that we do see less risk diversification between the various asset classes.

If you take-- I mean if you consider the risk exposure of our Bank, I can only say we have so massively reduced the risk exposure of this Bank.

Our biggest risk exposure was in our [turn of assets] and in the loan-- and in the loan book.

And we have massively derisked our Bank in this regard, so really we can afford a little higher risk in sales and trading.

The increase reflects an opportunity, as we said before not optimistic, an opportunistic approach.

Whenever we see market opportunities we are prepared to increase a little bit of our risk.

On your first question, CIB, you referred to an appendix in my presentation on CIB comp ratio but I could not find that appendix.

Could you give me the number-- the page number?

I mean more, not in your presentation, when you give all the detailed breakdown of the numbers in the-- for the-- basically all the quarterly results.

[Inaudible - overtalking] financial supplement?

Yes.

And basically when you look at that, you split out non-compensation operating cost base, and it has risen from €851m in Q1 to €893m in Q2 - according to this which is on page 8 of those.

Yes.

I just wanted to understand what is going underlying.

Yes.

Those numbers in a way are not too indicative for certain trends, and the reason is that certain allocated costs are allocated as non-comp expenses - even if they are usually they include compensation expenses at the service organization.

So you should not pay too much attention to this [place].

On litigation, I mean you understand that I am not in a position to give detailed provisioning levels on individual cases.

But I can only say that we review our litigation risk exposure on a quarterly basis, in accordance with the accounting standards.

And every quarter we make sure that we are adequately provided, based on the fact of information which are available at the time.

Could I ask it another way then?

If we looked at the first half cost base, has there been any litigation expense relative to what you see, maybe half one last year?

Not in a substantial way that there would be worth mentioning.

Okay, thanks very much.

The next question comes from David Williams from Merrill-- Morgan Stanley in London.

I do apologize.

Please go ahead sir.

Thank you.

Good morning, it is David Williams, Morgan Stanley here.

Good morning, David.

Two questions please.

One very simple and very brief could you just tell us where you expect risk rated assets to be going?

Whether you continue to further reduce risk assets and the client lending?

Or whether you feel you are now at a stage where that is about right.

The second question relates to slide 31 in your presentation pack, and really the philosophy behind your share buyback.

Clearly during the second quarter you purchased or repurchased significant volumes of shares.

I am just wondering really in relation to the fourth quarter this year, or sorry, fourth quarter of 2003, where you bought much fewer shares.

That the share price then was around €1.55 to €1.60.

You seem to be much more aggressive buying back stock at a much higher price.

I just wonder if you could really tell us what is guiding your share buyback philosophy there?

Thank you.

Yes, on risk rated assets, I feel they are about right.

So we do not have plans to further reduce them.

If you analyze our risk rated assets compared to revenues, and so on and so forth, I think we have-- we are now have become efficient in terms of risk rated assets, rated assets usage.

And that is the reason why we said in our management agenda too, we want to maintain that discipline but we do not see a need for further tightening, and if always we can achieve.

We have growth targets, as you know.

It is current, as you know, to free risk rated assets in less profitable areas to finance [indiscernible] might take us in attractive area.

As far as our share buyback program is concerned, unfortunately we cannot execute entirely or optimistically and go through the market when everything is appropriately.

Compliant-- There are compliance issues which have to be observed and therefore we develop a model and our-- mainly go to the market that is triggered by the model.

And clearly we also-- we do share buyback programs when we think they are appropriate in the interest of our shareholders.

And clearly regulatory constraints also have to be taken into consideration.

Thank you.

Next question?

The next question comes from Peter [Hein] from [Peer] Research in Frankfurt.

Please go ahead.

Yes, good morning.

It is Peter Hein from Peer Research.

I would like to ask two questions, one on income statement and the second on your balance sheet.

Your net income was €656m for the second quarter.

After this item reversal for tax rate changes of €93m.

Here come my questions.

If you release disposal gains of your industrial holdings in the second quarter, and if you add to which company stakes did you sell?

And how big were your disposal gains here?

And my second question regards to your shareholders' equity which came done by €1.3b compared to the first end of the first quarter.

And especial here the retained earnings came down by around €2.5b in 2/3 months.

Could you give some detailed information regarding this huge reduction of retained earnings?

Thank you.

Yes, on the first was our-- on the income statement that we refer to throughout the year - the disposals which trigger the release of those convertibles.

Was not that the question?

Yes, that is right.

There were three positions.

The largest position was a few shares in [Dimeblock].

Those shares were-- were called, so we will be, as we said before, we write options to a limited extent on our industrial holdings.

And as the numbers of [inaudible] the run rate these shares were called.

In aggregate, the gain was about €90m, so as the same as the tax reversals so that was a wash.

On shareholder equity, this-- the decline you referred to?

Yes, from 21.5%--

That is the cancellation of the 38m shares.

No value of those shares go against the issued capital and the other piece goes against retained earnings.

Okay.

Thank you very much.

Our next question comes from Adrian Fields from MainFirst Bank in London.

Please go ahead sir.

Yes, hi, it is Adrian.

I have two questions - one that has been touched upon by a couple of others, so I will keep it brief.

Again, I am-- it is-- I am confused with your statement that you tried to, or have already, taken the risk down from your Bank.

And eventually, the way I would observed, certainly for the last three months, is that you have a translation from lower loans on the balance sheet to a higher trading assets, a higher VAR.

And, therefore, maybe not a total degearing or lower risk but actually a higher risk, or certainly a different type risk which is more trading related.

So I cannot reconcile, certainly again for the last three months, what I have seen on the balance sheet, what I have seen with VAR, what I have seen with the risk rated assets, in terms of your last statement that you have taken risk down for the Bank.

I just wanted to know whether I have missed any fundamental trend - certainly into the future maybe things would change a bit here with a trading portfolio?

Could you just highlight that again for me because I do not think that tallies?

And my second question is a bit more specific, and that is in terms of the positive trend maybe we see in North America, and that is in [Scudder].

Just specifically on the Scudder franchise- I appreciate you are changing distribution there - can you just comment whether it broke even, whether it was profitable in the second quarter?

And can just isolate on Scudder, so could you give us a highlight there?

Thank you.

Yes.

The first of the second answer is very easy - was profitable - not by a huge amount but it was profitable, much better than last year which is very good.

And I appreciate that you recognize, or that you appreciate, the shift in our distribution strategy because that shift clearly positively impact-- impacts P&L.

On the risk, my statement, let me say, my statement was not specific to the second quarter but was cover, if you will, the entire period of our transformation.

Our risk in corporate investments, which were predominantly alternative assets but also our industrial holdings.

This is a non-trading - it is classified as a non-trading risk and the risk is not disclosed.

But as you can see from those positions - sorry, it is disclosed in the trading area.

And to give you a flavor, the non-trading market risks which relate particularly to corporate investment was €8b in 2002, came down to €5b by the end of 2003, and is now again much lower.

And as I said, that is the economic capital use - and I said before, before we further reduce, for example, our exposure to private equity by €400m, this reduces-- this clearly reduces our risk.

And then I said against this backdrop you have to see the increase in our, if you will, in our VAR, and the increase in our risk rated assets.

And the risk rated assets in the second quarter for a longer period time they have come markedly down.

Does this satisfy-- does this answer your question?

Yes, it does.

Thank you very much.

The next question comes from [Lee Canaven] from [Oppenheimer] in Frankfurt.

Please go ahead.

Yes, good morning, two questions.

First, fixed income pipeline for third quarter and fourth quarter.

Could you comment on the developments there and on your outlook?

And just briefly, also you mentioned in your report low volatility environment in capital markets.

Would that basically make you, or need to trigger you, to reconsider your sales and trading budgets for the second half of this year?

So we are now asking-- now we are in the territory of forward looking statements.

I mean, as I said before, this is from a historically low volatility in terms of trading equities.

However, once again, against this trend cash and derivatives performed very well, and this underlines the strength of our franchise in those areas.

On a going forward basis, no, we do call for review meetings with our global heads, and we have not revised their budgets for the second half of this year.

Then the very interesting question is our fixed income pipeline.

Again, I can only refer you to Joe's letter, you know where he said great confident in the franchise.

But you understand that I do not want to go to be specific as far as the third and fourth quarter is concerned.

Okay, perhaps one last question - 25% pre-tax ROE target.

I mean am I correct to assume that when you stick to the target, that that will also imply you sticking to the €6.5b pre-tax return end of 2005?

Or would you also perhaps shift that a little bit more towards the side that you reduced from all your equity?

That is a problem. [Inaudible - overtalking] on this €6.5b figure-- on this €6.5b.

This chart in most presentation it was page 40.

So, that was a demonstrate-- a demonstration of the visibility of achievability [indiscernible] of this target.

Because before we had always been ask is this a realistic target?

Tell us a logical way how you can get there because we cannot reconcile your profit perform-- your performance with the 25% target.

So, then we developed this and called it a model and said, look this is a model and shows you how we can get from the 2003 performance to a 25% target.

This is a model but it is one way to achieve the target but, as you rightly said, there are other ways to achieve the target.

And if we cannot achieve our-- the €6.5b, not the pre-tax side, we have to work on the equity side.

But at this point in time I do not want to make any comments on what the route is.

I can only say it is a feasible target.

We are committed and we are on track.

So you are sticking to the €6.5b then?

I am sticking to the 25% target.

Okay.

Thanks.

Last question, yes?

The last question for today comes from Mr. Mark Rubenstein from Credit Suisse First Boston in London.

Please go ahead sir.

Thanks.

Actually most of my questions have been answered but just one supplementary one.

Have you looked at the situation surrounding Abbey in the UK at all?

Good morning, Mark.

I mean we review developments in the market on a constant basis.

You understand that I do not comment on a transaction by other parties but I can clearly say that we know of the universe, particularly in Europe.

And we have, as you know, we have not expressed any interest and we wish both banks every success in their transaction.

Does this answer your question?

Yes, I think so.

Okay, so thank very much.

On this note I think we should conclude and I thank you for your time

Thank you very much for your interest and I wish good holidays to all of you who go on holidays.

Ladies and gentlemen, that concludes today's conference, you may now disconnect your lines.

Thank you for participation and good bye.