Deutsche Bank AG (DB) 2005 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Deutsche Bank Conference Call. [OPERATOR INSTRUCTIONS].

I would now like to hand over to today's chairperson, Mr. Wolfram Schmitt.

Please go ahead and I will stand by.

Yes, good morning everybody to Deutsche Bank's second quarter conference call.

We have live on our web the release, the data supplement and the presentation slides.

And with that, I would like to introduce the host of this conference call, the CFO of Deutsche Bank, Dr. Clemens Borsig.

Clemens.

Yes, thank you Wolfram.

Good morning to everybody on the call.

I want to discuss with you our second quarter result, and I'll go through the presentation which has been put on the Internet.

In the second quarter, we showed continued strong performance, despite difficult markets, strong growth momentum.

Our revenues are up by 9% to €5.9b, of which we saw accelerated growth in Origination & Advisory.

Very resilient revenues in sales and trading, in PBC and PWM, growth in key products.

We concluded an agreement as to the disposal of our Deutsche Asset Management U.K. business, and we continue to tightly manage costs and risks.

This performance in the second quarter then results in an [inaudible] performance, CIB as a world leader in key businesses.

We continued consistent investment in PCAM.

Our business realignment program is well on track for the half year.

Our net income is up by 28% to €2.1b.

This is 80% of last year's total net income.

This very strong capital formation allows us to plan for significantly higher dividend.

Of course, the dividend is subject to Supervisory Board approval, and they will decide on February.

But our plan is to propose to them a substantial increase, and today we also announced the resumption of a share buyback program.

On page 4 we do see the strong returns for our shareholders.

Earnings per share are up significantly in the quarter, 64% to €1.90, and for the first half up by 43% to more than €4.

This compares again with a total earnings per share last year of €4.53.

Our pre-tax return on equity, stripping out the restructuring activities, this is our yardstick, if you will, in the quarter was 25%.

They're in line with our target, and for the first half-year we have achieved a return on equity of 29%, well above our target.

So for the overview, let me now come to the Group results.

Again, I mentioned a strong growth in pre-tax profit and we do see the same trend in underlying profit.

So quarter-on-quarter we are up by 22% to €1.4b, and before restructuring expenses to more than a €1.5b, and this compares to €1.2b in the second quarter '04.

For the first half year we are up by 17% to €3.2b pre-tax, and excluding the restructuring activities to €3.5b.

Net income is also substantially up, more than €900m in the second quarter, close to €1b, I can say.

This is an increase of 44% compared with the second quarter '04, and for the first half year we are up by 28% to €2.1b.

And once again, those numbers include the restructuring charges.

Our tax rate came down - it's explained in the Investor Relations release.

It is the result of our efforts to manage our effective tax rate very effectively, and we do expect that our tax rate will continuously come down on an annual basis.

We may see some volatility, as far as the quarters are concerned.

For the first half, our effective tax rate, excluding the reversal, are below 35% and this compares to 36% the same period last year.

As I mentioned before, we have seen strong revenue momentum, and this despite challenging markets.

Our revenues, quarter-on-quarter, are up by 9%, €5.9b, and are up 8% to €12.5b for the first half.

We maintained strict cost discipline.

Here I want to explain our non-comp expenses came in at €1.6b compared -- that's the same number as the year before but it is an increase of around €100m compared to the first quarter this year.

This increase in non-comps is entirely due to one-off effects, for example legal charges, and we had quite a few other miscellaneous items.

So on an adjusted basis, our non-income -- our non-comp expenses were flat compared with the first quarter, and slightly down compared to the second quarter last year.

Obviously the comps are down compared to the first quarter by €400m, slightly up to €100m up compared to the second quarter '04.

Again, the non-comp -- the comp expenses, excuse me, are driven by performance and the variation is entirely due to performance-related compensation.

The non-performance compensations related to compensation have come down.

And as a result, we have seen good progress on cost ratios.

You'll find the reported numbers on page 10.

I'm referring to the underlying numbers, which you can -- which you will find in the appendix on page 40 -- 45.

The underlying numbers are somewhat more indicative as to our focus on cost, and I can say that on an underlying basis, our cost income ratio is down by 4 percentage points compared to last year, both for the quarter and for the second half.

Let me now turn to segment results on page 12.

Here's a summary of the segment results.

I will now talk about the individual segments in a moment.

First, CIB on page 13.

We have seen strength across the board.

Despite a difficult market, our results are up by 12% to €855m.

We do believe that the second quarter was characterized by a strong performance in both segments, Corporate Banking and Securities, as well in the transaction bank.

We saw solid growth momentum, demonstrating high quality of our business model, which includes outstanding diversification.

This momentum, on page 14 - I'm now on page 14.

We consolidated our leading position in investment banking, as you can see here.

Whereas in the first half, we had the strongest momentum in terms of revenues, which allows us to consolidate our leading position.

In the last quarter, I talked about a strong pipeline in Origination & Advisory.

Now this strong pipeline now translated in accelerated revenue growth.

As you can see, quarter-on-quarter we are up by 17%.

We have gained market -- continued to gain market share, as is outlined on page 16.

If we take the fee pool, our share has now increased in the second quarter to 5.4%, which gives us a number four position on a global basis.

This was thanks to advances in key markets and products, as is outlined on page 17.

We have seen a particularly strong performance this year in the Americas and in Asia Pacific, where we could substantially improve our competitive position.

Talking about Sales & Trading, strong revenues despite really challenging conditions.

Sales & Trading, debt and other products; very resilient revenues thanks to continued strong client activity, both in volume as well as in intellectual capital products.

And also, we benefited from tight risk management.

We saw specifically good growth in areas such as commodities and in emerging markets.

Our equities performance was somewhat more mixed.

The key highlights here are a strong performance in client services; a better performance in equity prop compared with the second quarter '04; and particularly, a reduction in the risk profile of this business.

In cash equity, we saw a somewhat weaker performance, with very competitive markets for program trading.

The overall performance, year-on-year, in equity revenues, resulted also from the release of an operational loss provision made in previous years, which is no longer required.

This improved current quarter earnings by €65m.

While this amount is not material in relation to our overall earnings, we believe that this disclosure is relevant in view of its specific impact on equity sales and trading revenues.

In Global Markets, which includes Sales & Trading debt as well as equity, we maintained, solidified our number one position.

We clearly, as I mentioned the last time, are benefiting from our business realignment program here.

We saw amongst the strongest revenue momentums, as is outlined on page 19, with an increase in revenues of 12% for the first half '05, compared to the first half '04.

I would like to mention that Merrill Lynch disclosed that in their numbers there is a private equity gain and the effect of a first time consolidation.

Adjusting for those two factors, their increase in revenues is significantly lower.

We out -- we continued to outperform fixed income in difficult market, as is outlined on page 20.

On page 21, you'll see the VaR development.

I'm pleased to say that our -- we maintained our revenue level compared to the second quarter, with about 20% less in value at risk.

GTB, the profit in GTB is significantly ahead of 2004, as you can see, with a pre-tax profit of €119m in the second quarter '05, compared to 44% -- to €44m, excuse me, in the second quarter '04.

We saw solid growth in key businesses, and we also saw substantial cost savings, which then resulted in a pre-tax -- in a substantial pre-tax profit improvement.

In GTB, we have a clear strategy for continued profitable growth.

On the revenue side, we want to exploit our leadership position in cash management.

We drive stock for finance in the domestic custody business, and we continue to deepen cross selling for risk products.

On costs, substantial progress.

We consolidate our European hubs.

We align the sales with coverage.

We have rolled out a trade processing center in Germany, and we continue to do smart sourcing.

In PCAM, we saw stable results compared to the year 2004.

We see continued strength here in Europe across PCAM.

We saw revenue growth in key product areas.

We continue to invest in our platform, and we have made good progress as to the restructuring, reorganization of the business.

In Asset and Wealth Management, a resilient performance in the first half of this year and here I have to say, despite a comprehensive reorganization of our Asset Management business.

We do however see, as I mentioned before, continued strength in Europe here.

We -- the sale of our U.K. and Philadelphia based business will accelerate the reorganization, and we have seen strong performance fees, especially in Alternative Investments.

In Private Wealth Management, we have seen strong revenue growth in core businesses.

We continue to attract new money, €2b again in the second quarter, making €4b for the first half of this year.

And we have improved the returns on invested assets for us.

PBC continued with their strong profitability, despite continued investment in their franchise.

We have seen growth accelerating in Germany, which is very pleasing.

We see revenue growth in retail deposits and loans, as well as in investment and advisory services.

Once again, we continue to invest in our platform in Germany and outside Germany.

Let me now move on to risk and capital.

Here the story continues to be very good.

The lending book, our retail lending book increased by 10% year -- quarter-over-quarter while, at the same time, our corporate loan book came down by 12%.

In retail this is the result of our growth strategy, particularly in the area of consumer finance.

On the corporate side, the decline of the loan book is the result of our tight risk discipline and also of a slow demand in key markets.

On page 29, the trend in problem loans.

Problem loans have further come down now, to €46b.

This is equivalent to 3.2% of our loan book, and coverage ratio has gone up to 49%.

We are very pleased with this trend.

The continued improvement in the quality of our loan book is also reflected in our risk provisioning, which you see on page 30.

Again, in the second quarter our risk provisions were only €80m.

So for the first half we are down by 28%.

Capital, on 31.

Our shareholder equity has gone up, partly due to our improved profitability.

The net asset value per share has gone up by €4.40 and our Tier 1 capital has also gone up.

The result is the very strong Tier 1 ratio, at 9.1%, again over and above our target range.

Let me conclude my presentation with an update on our initiatives, on page 34.

Again you see our objectives of the business realignment program.

And once again, I would like to emphasize here the primary objective of this program is to improve our competitive position and to position ourselves for further growth.

Cost reduction and -- cost reduction is a second dimension but it's not the primary objective.

The primary objective is competitiveness and growth.

I can report that the business realignment program is well on track, exactly as planned.

By the end of the second quarter, 3,600 people under the realignment program have left the platform or have been notified.

This is about 56% of the total reductions.

The negotiations with the Workers' Council in Germany have been completed, so we will see here also -- we will see here then in the second half the departure of respective -- the notifications.

The headcount development you'll find on page 42 in the appendix, and here you can see the continued reduction in our headcount.

On page 36, you see the development of the restructuring expenses.

Again, so far the program has been somewhat cheaper than before, same reason as the one I gave you the last time.

It is that we have planned these less [indiscernible] levers within the program.

Part of the program is the streamlining of the infrastructure, and here again you can see the progress which we have made.

So bottom line, the program is well on track as to the implementation, as well as to the expected result.

In summary, the second quarter '05 showed a strong performance.

And I have to say, and as Joe Ackerman outlined in his letter, we are about our performance in the second quarter, in a way proud then about our very, very good, excellent performance we have seen in the first quarter.

As the performance in the second quarter was achieved in clearly challenging market, and this performance clearly demonstrates the resilience of our business model and our continued discipline as to cost and capital.

On page 38, you have again the key features of our performance.

I'd like to conclude my presentation by pointing out that this performance, again, is not an accident, but it's the result of a very effective business model, and it's also the result of a clear strategy.

We do have a clear strategy in all business areas we are in.

Our strategy is clear, as far as our strategic targets are concerned.

It's clear as far as our product offering is concerned, and it's clear as our market coverage respective penetration is concerned.

And on page 39, you have the key components of our strategy for each and every business.

And we clearly do believe that the effectiveness of our strategy is the basis for our performance on a going forward basis.

And this concludes my presentation, and we are now pleased to take any questions you may have.

So we hand back to the moderator to organize the Q&A session, please.

Thank you. [OPERATOR INSTRUCTIONS].

Our first question comes from Jeremy Fitch.

Please announce your company name, location and go ahead.

Thanks very much.

Jeremy Sigee from Citigroup.

Morning Jeremy.

Morning.

Could I just ask some questions on the costs again?

Two questions.

One is, could you talk a bit more about why your restructuring charges were less than expected?

Which aspects of the process might have been delayed, and how that plays out in terms of timing going forward?

Secondly, could you come back again on to the discussion about non-comp, and give us a bit more detail on what were the funnies?

And also, even stripping out the funnies that you're alluding to, why were the non-comp costs not actually down on Q1, given the ongoing restructuring program, and given that revenues were lower as well?

Those are your two questions?

Well, on the non-comp I gave you that number, that around €100m are classified by us as one-offs.

There's the key component on legal charges, for example, for a case in France, for a few cases in the U.S., which we settled.

The non-comp expenses are also impacted by our outsourcing activities, and those outsourcing activities do lead to a shift of expenses from comp to non-comp.

And the effect of this in this quarter, compared to the same quarter last year, was also was around €50m.

That is something we'll have to keep in mind.

It's a bit -- a little difficult to track.

So the €50m clearly is a conservative number, then the effect might be even more.

We do see this effect on the comp side as our -- the salaries have come down.

As again, as I said, on the comp side one has to take into consideration with what I said a performance-related compensation.

And the performance is this year is much better than last year and this has an impact on performance-related.

I have to say, no payments have been made so far, we are talking accrual.

And I said in previous -- on previous calls, we have established a methodology and we are following this methodology very rigorously.

In the non-comp expenses outside the operating cost base, there is also an effect of some real estate transfer taxes in Deutsche Borden (ph), resulting from a restructuring of the portfolio.

We have to consolidate Deutsche Borden because we control it, but we don't have any ownership in it.

So the credit for this expense is found in minority interest.

On the restructuring side, again I can only confirm to you that the program is very well on track.

It's exactly what we have scheduled.

The restructuring charges are lower but quite frankly, this isn't anything I'm worried about.

On the contrary, I'm very pleased that the control -- we seem to spend so far have -- we have spent less money on the restructuring than what we have planned.

And as I said before, a key component is that we had more [indiscernible] levers, and that's the most effective way to restructure from a finance point of view.

But I can only repeat myself, the program is well on track but it's cheaper than we thought so far.

But we do want to maintain as outlined in the IR.

We do want to maintain the budget which we have determined at the beginning of this year.

That's great.

Thank you.

Our next questions are from Patrick Clemence.

Please announce your company name and location, and go ahead.

Hello.

Patrick Clemence, ABN Amro in Amsterdam.

Hi Patrick.

Hello.

Well, I am very happy to see the progress, and I'm sure also for sure the development in the second quarter versus competition, which absolutely has not been disappointing.

I do have a couple of questions though.

On the one hand, and while Jeremy already referred to this to some degree, CIB saw its cost of income ratio move up quite sharply from Q1 to Q2.

Maybe you can give us a little bit more data whether 76% is the best (ph) level for you?

And then how far is those -- is there a quick -- a case for perhaps under accrual in Q1?

Now you've said you have a methodology but still.

Another question I have is, what you said at the majority of the cost savings for this year will be achieved in H2?

And finally, perhaps on the dividend you have something about, well, substantially increasing.

Could you perhaps give us some feel for what a normal payout ratio should be for Deutsche?

I know that global banks very often are in the range of 40%.

I don't know whether you would go there?

Yes, thanks.

As far as the cost of income ratio in CIB is concerned, as you can see the cost of income ratio is not is impacted by cost development, but also by revenue, deferred by revenue development.

And if you compare the revenues clearly, because it's a seasonal business, in the second quarter are lower than in the first quarter, but they are up to the second quarter last year.

On an underlying basis, compared with the second quarter last year, the cost of income ratio is down by -- to 76% compared to 77% last year.

And if you take the first half, the decline is even more impressive.

I clearly dismissed the notion of an under accrual in the first quarter.

As I told you, we have established a methodology and we are following rigorously this methodology.

I would also like to say that, as far as performance-related compensation is concerned, the so-called payout ratios varies within several -- within the -- from business-to-business.

And as a result of this, our accruals are also impacted by shift in the mix of our revenues respectively, of our profit -- the profits in the various businesses.

Again, on cost saving I'm repeating myself.

We have seen a few one-offs, as CBI is also impacted by those one-offs, as I mentioned before, because the one-offs are all allocated to the respective businesses.

On dividend, as Joe Ackerman pointed out particularly at the last AGM, we want our shareholders to benefit from our performance, and we are committed to a dividend policy which will - it is related to the performance of the Bank.

So in good years we want our shareholders to benefit, and the year 2005 so far has been a good year.

You mentioned a payout ratio of 40%.

I have to say we consider the payout ratio for dividend also in connection with the money which we spend on share buybacks, because that is another way to return money to shareholders.

But we have the feel that our shareholders want us to buy -- to continue to buy back stock, as long as we generate the much capital.

But also want us to hand over to them the profits in the form of higher dividends.

Your 40% payout ratio, I must say, is not so far apart from what our current thinking is.

And if you run the numbers, you can figure out in our -- from our financial data supplement that we have made an additional, a higher provision in the first half of this year for the dividend than last year.

And this higher -- We have reserved -- I can give you the number, €700m, and this gives you an indication of where we see the dividend situation.

What we also monitor is the yield side of the dividend, and with a yield between 2.3 and 2.6 for the dividend which we pay 2005, we are clearly behind our peers.

And depending upon the stock price but, say, based upon today's stock price, we clearly do want to see a 3 in front of the yield number.

Was this specific enough?

Yes, thanks you very much.

Our next questions are from Fiona Swaffield.

Please announce your company name, location and go ahead.

Good morning.

It's Fiona calling from Execution in London.

Good morning Fiona.

Hi.

Just a couple of questions.

Firstly on the share buyback.

I'm a little bit unclear as to what you've done, or what you're going to do, with the previous buyback program, because I don't think you've cancelled any of those shares.

Could you talk about that, and is it that you're just -- in terms of the new stance, I think you're now putting in a sentence where it says you can use the authorization, or the shares for other purposes?

So could you talk maybe about current acquisition plans?

The second issue is an Asset and Wealth Management and obviously the disposal.

I'm seeing some numbers that have been given by the acquirer on the business.

But could you talk about how the disposal's going to effect the P&L in Asset and Wealth Management?

And specifically whether we should expect the entire cost base to leave Asset and Wealth Management, so you'll see quite a significant upturn in pre-tax profit?

And if you could give some numbers on that?

And the third issue is risk rated assets.

I assume there's quite a bit of currency in there, but I don't know if you could talk about the fact we've had 14% growth in the first half?

How much of that is organic, how much is currency, and what you're planning for risk rated assets growth going forward?

Thanks.

Okay.

Thank you Fiona.

On the risk rated assets one, about 50% of the increase is currency.

The other 50% is almost evenly split between committed -- an increase in committed lines and derivatives.

Our plan - we have a cap and the whole thing depends upon the currency development.

The 50% of the increase just for organic growth if you will is, I would consider, not a significant development.

And if you take into consideration the growth of our business, it clearly shows that again we can grow our business much faster than the risk rated assets growth.

And this is a big advantage as far as our business --

Could I just check on that, that in your Tier 1 ratio though does the currency not really have an impact?

Because some of your prefs are in -- some of your hybrid's in dollars or -- So is there not a really currency impact on the ratio?

Hang on.

You asked with the risk weighted assets are impacted by the currency?

Yes, but the total ratio --

The regulatory capital is also impacted by the currencies, and as we said from a Tier 1 ratio point of view, our US dollar risk weighted assets are hedged.

The currency translation moves in sympathy with a risk weighted asset -- with risk rated assets.

So that movement -- the shift in exchange rate between the dollar and the euro is neutral, as far as the Tier 1 ratio is concerned.

I know, Fiona, you run the numbers in all and each and every detail.

The decline of the Tier 1 ratio from 9.2% to 9.1%, is due to the upper half of the organic growth but is also due to a higher that -- the aforementioned higher provision for the dividend.

On the share buyback fund, we haven't considered -- No, I can say I'm really not in a position to make any comment on acquisition, or to change the language.

We have always said we are -- our focus is on organic growth, and we have demonstrated that we can grow the bank organically.

We are opportunistic as far as are acquisitions are concerned.

If they do make sense strategically and compliment our businesses, and make us more competitive, and the numbers have to work.

But there's currently nothing in the pipeline which would cause me to change the language here, and my language is very consistent also what Joe is saying.

On this we have current 33m shares in Treasury.

We don't consider this as a pressing problem for us.

You may recall that we do need about 20m of shares around, for stock based compensation next February.

We don't -- We didn't want for -- to put us under pressure to buy now back stock for equity compensation.

You also know that our 33m shares is relatively low -- in inventory is relatively to our peers.

We are now starting to buy back -- to further buy back stock.

I don't give you any indication as to the volume and so.

And if need be then we will take a decision what to do and -- with the stock which we have then bought back, and how many we want to eliminate.

But please don't read from us having 33m shares, equivalent to €2.2b in value as this being our ammunition for an acquisition.

Those €2.2b wouldn't get us very far.

On Asset and Wealth Management, let me say this.

There is a positive impact because we will make a gain on the disposal.

We expect this transaction to close in the fourth quarter.

Part of the purchase price, as customary in such transactions, is related to the assets transferred to the buyer.

We are highly confident that we will get, after closing, quite a nice profit for us.

And I can also say that our P&L after closing will be favorably impacted by lower cost, and the business hadn't been profitable for us.

So there will be a positive impact on the P&L, but I don't think at this point in time I should go further on that.

Okay, thank you.

Thanks Fiona.

Your next questions are from Huw Van Steenis.

Please announce your company name, location and go ahead.

Morning.

It's Huw Van Steenis from Morgan Stanley.

Two questions.

First, can I just follow-up on Fiona's on the Asset and Wealth Management?

You've had about 14% operating margin in Q2, which I think is about half where I imagine you want to get to.

And our sense, certainly from the Aberdeen numbers, would be that sales of the DeAM will only be a small part of closing that gap.

Can you give us an update on other restructurings, either at Scud or Alex Browne, and how fast do you think you'll be able to close that gap?

And secondly, clearly you had a fantastic result in Advisory and clearly very strong in fixed income.

Can you give us a sense of how confident you feel about the backlog going into the second half, any update on July which I think is a very constructive environment for fixed income?

Thanks.

Yes.

On Asset and Wealth Management, we are very well aware of the performance gap which exists, and that is the reason why we have initiated in Asset Management a comprehensive reorganization program.

And these transaction, this Aberdeen, is very significant in this context.

There is reorganization going on as far as the strategy is concerned.

We are shifting -- focusing our strategy more on high value added, high margin product here.

Again, the programs have been launched here and are well on the way.

We are restructuring our business in Japan, and there some money outflow -- is -- the money outflow in Japan is the result of this restructuring.

The U.S. is still an uphill battle for us in a way because we are in the penalty box there, relating to events which go back before we are -- before we acquired Scudder.

And until those issues are not resolved and a resolution is not -- the timing of that resolution is not under our control.

Unfortunately, it's very, very difficult.

Kevin today is giving a presentation to the Supervisory Board this afternoon, and that is a very convincing presentation and we are very -- he is and we are all are very confident that the reorganization which he is doing right now, will get us to -- will achieve the closure of the performance gap 2006/2007.

Clearly he is, as I mentioned, he is working on the strategy fund.

He is working also on the cost front.

For example, the disposal of the U.K. business allows us to consolidate the manufacturing hubs in Frankfurt and in New York, which will result in significant savings.

So cost reductions are also very much part of the reorganization.

On Advisory, I can repeat -- I'm pleased that I'm able to repeat what I said last quarter.

The pipeline is still very strong in Advisory but also in primary markets mandates, so we are very optimistic here.

And as far as you can have a backlog in fixed income, we are doing well.

Thank you very much.

Thank you.

Our next questions are from Mark Rubenstein.

Please announce your company name, location and go ahead.

Yes, Mark Rubenstein, Credit Suisse First Boston.

Hi Mark.

Hi.

Good morning.

Just a couple of follow-up questions, I suppose.

One on fixed income.

You've written in the investor relations release some of the trends within fixed income relating to commodities, emerging markets and so on, relative to second quarter of last year.

I was wondering if you could just give a flavor as to the trends relative to the first quarter of this year.

Many of competitors spoke about a weak environment in credit, for example, although I think Merrill Lynch was an exception.

So I'm just wondering how you fared there.

And then second question, there's a slide, I think it's 17, where you show your market shares of the fee pool.

And I suppose, unsurprisingly, it's been a feature of the past few years.

But there's a relative underperformance in M&A from a product perspective and then geographically in the U.S.

Now, one of your European competitors has made a big push towards increasing their share in the U.S.

And I was wondering if this was an important gap for you, whether you were allocating incremental resource to filling that gap or whether it was less important?

Okay Mark.

First, on page 17, you can see that we have in, clearly, in M&A our total position is number eight.

But, as you can see, we have improved our position in the Americas by 2 ranks, in Asia Pacific by three ranks.

Unfortunately in Europe we had lost one off.

Well, we are dedicating, we are fully aware that some of our peers have a higher share of M&A revenues, higher share of the total investment bank -- investment banking revenues.

This is something which we are working on and I guess our performance so far demonstrates that we are, A, committing more resources, and B, getting the right results so that we are moving gradually up the ladder.

And I can also say, for example, the improvement in the Americas clearly is the result of us dedicating -- dedicating more resource -- more resources here.

So I must say, you know in M&A we have come from virtually nowhere.

And we are making steady progress and I expect this trend to continue.

Okay.

On fixed income I mentioned our performance -- our performance in the emerging markets was particularly good compared to the second quarter '04.

It was not as high as in the first quarter.

But we all know that the first quarter was particularly good and there also a lot of seasonal -- a lot of seasonal factors in here.

In commodities we did very well in the second quarter, even delivering a better performance than in the first quarter this year.

Definitely a better performance than in the second quarter -- the second quarter last year.

So we are very pleased with those developments.

And I do believe that we will -- we will -- we will continue to do at least relatively -- relatively well.

When talking about fixed income one also has to take into consideration the market developments beginning in the middle of March and continuing until May, which led to an enormous dislocation in some areas.

And, if you look at our numbers, as said before, we have weathered the storm extremely, extremely well.

And, given our strong position which we had in some of the areas which have most been affected by dislocations in the market, our performance in this part is obviously even more -- is even more impressive.

And this is what I wanted to hint to when I said the effect of a very effective -- getting the benefits of a very effective management.

And just briefly, the area of credit in particular, was that down in line with the overall debt performance?

Or was it much worse, offset by commodities, for example.

No, the contrary.

I don't want to go further, but the contrary.

Okay.

Thank you.

Thanks Mark.

Next one.

Next questions are from Vasco Moreno.

Please announce your company name, location and go ahead.

Hi.

It's Vasco Moreno from Keefe, Bruyette & Woods in London.

Just a few questions actually.

Just on the GTB unit, if you look at the cost evolution it's very strong improvement actually, first half on first half, also year on year on a quarterly basis.

Before, when we used to ask you whether this was recurring, you didn't used to really give us any detail.

Would you mind giving us some detail now in terms of whether we can now really start plugging in that figure in terms of costs on a quarterly basis of, say, around €350m, which is about, again, €50m less than the previous year on an ongoing basis.

That would be the first question.

And also if you can give us the reason for that, that would be great.

Second question is related to the operational risk reserve release that you had within equities revenues.

Equities of sales trading revenues.

How much is reserved currently, fully.

And then overall can you give us an idea as to what the ongoing potential release will be if there is an ongoing release going forward.

And then thirdly, with regards to the acquisition criteria, can you just give us a rationale for the going into Eastern Europe, or the push into Eastern Europe that you seem to be having given that you've been rumored to be buying several banks in Eastern Europe recently?

That's great.

Thank you.

Okay.

On GTB, as I advised the outline on page 23 of my presentation, we clearly were -- there has been and still is a cost reduction program going on which will reduce our costs.

I talked about the consolidation of the European hubs and smart forcing and the others.

So the effect of that program, clearly, is to lower -- to lower the cost base and to improve the margin.

And we all know that entry in from the transaction bank there has been a performance gap.

And the performance gap was due to our cost base being too high.

So GTB is very much also part of the realignment program.

So, on a going-forward -- on a going-forward basis I see the cost reductions which have been achieved as permanent.

On that operation risk reserve, I think we have gone with our disclosure as far as one can go.

So I guess you all understand when I say that I am not in a position to give further details on remaining operational risk reserves.

But you should know our purchase, if we do see an operational risk, we consider the situation and adequately arrive to potential operational risk.

And that is permanently on a quarterly basis those provision are under review.

And as the operational environment -- as the operational environment improves we have to release those reserves.

But the key, what we have believed so far in this particular area clearly is what has been assigned to this particular risk.

Sorry, just on that, can you give us an idea if it's related to maybe DB advisors or another area of the business?

And then secondly --

No, it's related to a complex business which had grown very fast in the year 2000 to 2002.

And when you do have a complex product area with very, very fast growth, you always have the problem -- the infrastructures making sure that the infrastructure catches up with the business volume.

And if you do feel the infrastructure doesn’t fully, it doesn't fully catch up then.

You assess the situation and you provide for it.

But, once again, it relates to this growth -- it relates to the growth in this area.

But once again, we highlighted it because we wanted to make it transparent.

But no one should make too much out of it.

It's more customary.

It's customary stuff in investment banks.

We highlighted the number because the entire growth year on year, second quarter this year, second quarter last year was due to this release.

And we didn't want to mislead you.

So it was more -- it was entirely to be fully transparent but not that we are in a situation where we have to cut something very significant because it is not significant.

Acquisition criteria.

The first really is does it make strategic sense of an acquisition.

We feel very satisfied with our current portfolio and we don't see any need for further diversification.

We have a clear strategy, as is outlined in my presentation.

And any acquisition has to be truly of high strategic value in the context of our current strategy.

Financially, you know we had this -- we have cost of capital.

We have a hurdle rate which his over and above the cost of capital.

And an acquisition has to achieve very quickly the hurdle rate.

And the acquisition also has to achieve a 25% return on equity in a reasonable period.

Of course, we also look at the issue of earnings accretion.

We look at the issue of -- particularly the issue of EPS growth and what is the impact on EPS growth.

And an acquisition which is dilutive on EPS, that would be something very, very difficult.

Eastern Europe, we outlined that our strategy in retail is a multi-country strategy.

Eastern European countries are neighboring Germany, if you will, and are considered as countries with good growth.

So the growth aspect of an acquisition is also very important to us.

And, as you know, we are operating successfully in several European countries, so we do believe that expanding our franchise into countries with good growth prospects would make sense if we can pull out our business model, if we can bring our strength to fruition.

And, again, if we can justify such acquisitions on a financial basis.

Thank you gentlemen.

Our next questions are from [Christopher Lehler].

Please announce your company name, location and go ahead.

Yes.

Good morning Clemens.

Just a couple of quick questions.

Fortunately some others have already been answered, you will be pleased to know.

Just on page nine, you discuss the declining compensation costs of €400m, the [2.3] and the 2.6.

And you talked a little bit about obviously how much of that was -- and you said in compensation how much of that was underlying compensation.

I think we get a bit of a clue on page 10 as to what the impact might be then.

Can you give us a better clue as to how much of that decline was due to actually an underlying reduction in or ongoing reduction in basic salary costs, etc., as a result of the restructuring program?

That's the first question.

Second question partly touches on what Vasco was asking on page 18.

The €65m provision, operational risk provision, if we split that out we come down to some numbers which are very similar to the second quarter of last year --

What page are you on?

18.

Now the second -- yes, page 18.

The second quarter obviously was looked upon as a disappointing quarter because you obviously did have some problems in some of the proprietary and convertible businesses.

And I just wondered if you could give us some insight, just some subjective views, maybe, on what happened in the second quarter this year, how much of that decline or how much of the performance was down to the market being obviously very turbulent.

And how much, perhaps, would you attribute to the fact the business is going through a flux of quite a major restructuring as part of your cost cutting and efficiency design?

Thank you very much.

Yes.

On equity I guess I gave you some indications.

Just one moment.

Yes.

And I mentioned as an area of weakness program trading and then cash.

You know that margins are enormously under pressure there.

It takes, therefore, an enormous growth in volume just to stand still.

Those are the areas.

Last year we mentioned -- that's right, we mentioned proprietary trading as an area of weakness.

And I also would like to point out that the stable result, which results in equities also achieved with significantly lower risk.

So I talked about that the total risk has come down; measured in Var, has come down by 20%.

And we clearly reduced risk quite a bit in equity.

So when I look from a revenue/risk perspective, as a performance, it's a very, very strong -- a very strong performance.

And, as I indicated at the beginning of this year, our strategy in equity was to reduce risk.

On the comp side, your question really relates to the $1m question, or perhaps it's $1b, how much was the accrual for the bonus pool.

This is the number people within the bank are very interested in.

And I know you guys too.

But you understand, as I said several times before, I don't want to go further than that.

But I can tell you that we have seen good progress on the fixed salary fund, partly positively impacted by outsourcing activities, but also as a result of our reorganization levels.

And I really have to ask you to understand that I cannot go further than that at this point in time.

At any point in time.

Okay.

Well thank you very much.

Thanks.

Next one.

Our next questions are from Adrian Guild (ph).

Please announce your company name, location and go ahead.

Hi.

It's Adrian from Main First.

Hi.

A couple of questions.

One is a clarification one, very quickly.

Restructuring costs, once again.

The way I interpret your answers is a bit contradictory.

On one side you say things have been cheaper so far, yet you want to charge yourself the full budget until the year-end.

So ultimately it won't be cheaper, just that you will charge yourself at the latter end of the year.

Am I interpreting this right?

That's question one.

Question two is a strategic call on the investment banking, one of the pictures that showed high yield seems to be that most of the share rankings that you have within that particular business stream are declining.

Is that strategic pull back or is it just market movements?

Question two.

This is of --

If you want to answer that, fine.

I have a couple of other questions after that.

Overall, it's not overall as we have gone down while not been in high yield.

And I wouldn't consider this as significant.

Clearly -- it's clearly transaction related and I'm highly confident that on a going-forward basis we will climb up again.

The key message is we are -- this is really an area of our -- where we are very strong and have a strong competitive position.

And we all know, the second quarter was a bit difficult quarter in that regard.

So I wouldn't read too much into this.

On restructuring I said, and I have to read it, I said that so far we have spent less than thought.

But at this point in time we want to keep the budget as it was at it was planned.

We don't change the budget all the time.

So for the time being we keep it intact.

But I can assure you that all our restructuring programs are scrutinized very much for the economic impact of those programs.

For the interest of time, keep it crisp.

Yes, very good.

One last question then, and that's just a broader strategic question on, again, page 39.

It's to do with your clear strategy.

And one of which is the leading position in German retail banking.

Having looked again at the growth within that division in Q2 it seems to be stagnating on to sometimes onto the bottom line.

I do understand that you're still growing organically.

But is this satisfying enough?

Are you excluding anything else other than organic growth in the German retail banking strategically?

Thank you.

Okay.

Again, in Germany, and I say our revenues have grown 4% in the second quarter.

I do believe that this is a good number for the German market which is basically flat.

The revenues have been driven primarily by investment products.

And this is clearly a clear strength as far as our retail bank is concerned.

If you do a peer analysis of Deutsche against its peers in the German market, you will see that we clearly are not only number one in terms of revenues, but also number one in terms of profitability.

But I do believe also number one as far as the effectiveness of the business model is concerned.

We do have in Germany more than 8m clients.

So we really don't need, at this small scale, additional scale.

We do see a potential to further improve our bottom line by selling more products by improving the cost/sell ratio, for example.

The reason why this growth hasn't translated into the bottom line is we want to grow the business and therefore we spent money.

And we do spend money in Germany to strengthen our platform.

And we do also spend money in some countries outside Germany, for example, in Poland, where we are currently underway on a rollout program.

We are satisfied that we are -- we don't want to maximize the profitability of that business at the expense of growth.

On the contrary, we want to maintain the profitability and -- want to maintain profitability and grow the business.

And one has to say Germany in retail has been a flat market quite for some time.

Nevertheless, the business has managed to grow its revenues in Germany.

The conclusion is they have gradually gained market share.

And this is something which we want to see to continue and, perhaps, even to accelerate.

Thank you very much.

Moderator, we would have time for one last question.

The last question is from Mette Hanzen.

Please announce your company name and location.

Go ahead.

Yes.

Hello.

This is Mette Hanzen, Sal Oppenheim.

Hello Mette.

Hi.

Hello.

One question concerning interest income.

I hope I didn't miss that one, but the 12% increase Q2 versus Q1 in interest income, how much of that is foreign exchange?

Could you please touch on that?

And second question is concerning your €5.3b industrial portfolio.

The current discussion in Germany concerning taxation of disposal gains, would that trigger a charge against your equity in case this tax comes?

And also could you touch then again here on Daimler Chrysler?

What's your policy towards that stake?

Thanks.

As -- on Daimler Chrysler, as we said, it's primarily an issue of the stock price.

And you understand we don't want -- there is no need for us now to sell this position expeditiously.

And we are, for us, it's an economic -- it's a pure economic collation and once the price is right we will continue to sell.

And you may know, I'm sure you know that we have already reduced our position from more than 12% to 10.4% at this point in time.

I didn't touch the issue because I didn't go into the Group P&L by revenue categories.

I guess your questions relate exactly to that and net interest revenues.

In the second quarter net interest revenues are very good every second quarter.

And interest revenues are favorably impacted by dividend payments such as Daimler.

However, if I split out all that stuff, we have seen, year on year, we have seen -- we have seen an improvement of our net interest revenues.

And, for example, we have seen an improvement of net interest revenues in PTC, which is logical because the loan book there is up by 10% and deposits are up by something like 5%.

Okay.

But just going back to industrial portfolio, if we have the tax change in Germany --

The tax rate in -- okay, let me say I am not worried at this point in time.

And also you have to say it's early days.

And the thing, all companies have taken precautionary measures against such -- as to such a change.

So, at this point in time, we haven't seen anything so far except some noises from the -- from one of the parties.

At this point in time I am not worried.

And I have no reason for any unfavorable impact on us on such a move.

Okay.

Thanks.

Thanks Mette.

With this we would like to close the call and invite for further questions reported to the Investor Relations team.

Thank you.

And thank you Clemens.

Thank you, guys, for your interest.

Ladies and gentlemen, thank you for your participation.

This concludes today's conference.

You may now disconnect your lines.

Thank you.