Deutsche Bank AG (DB) 2006 Q2 法說會逐字稿

Good morning and good afternoon ladies and gentlemen.

This is the Chorus Call conference operator.

Welcome to the Deutsche Bank publication of figures for Q2 2006 conference call. [OPERATOR INSTRUCTIONS].

At this time, I would like to turn the conference over to Dr. Wolfram Schmitt, Head of Investor Relations.

Please go ahead, sir.

Yes.

Thank you, Vicky.

Good morning to everybody.

This is Deutsche Bank’s second-quarter call on August 1.

With me is our CFO, Tony Di Iorio, who will present our results to you, and subsequently answer your questions.

We will refer to a slide presentation which I assume everybody has in front of him.

Otherwise it’s available on our website.

With that, Tony, I hand over to you.

Good morning everybody, and welcome to our second-quarter call.

Starting right in on page three of the slide presentation, there’s a summary of our results, with reported net income of €1.2b, which is up 29% from the second quarter last year.

Overall, the performance for the quarter was very strong, in challenging markets.

We’ve had significant increases across all segments.

And we will touch at the end of the presentation on some investments, particularly the bolt-on investments that we announced in the quarter.

Moving to page four, our pre-tax ROE came in at 29%, which is over a target definition number of 25%, as we had indicated earlier this year.

We would look at 25% over the cycle.

And we are conservatively over that for the six months, as you can see on the slide for -- at 35%.

Earnings per share is up 37% versus the first half last year.

And on the year-to-date basis, at €5.57, we’ve earned 80% already in 50% of the year of our diluted EPS for 2005.

Let me pause for a second and just talk about some dynamics in the diluted EPS calculation.

Normally you would expect that the share count would be the prime effect from basic to diluted shares.

In this quarter though, there is another adjustment which is only for purposes of calculating under U.S.

GAAP diluted earnings per share.

And that is in the numerator of the net income.

Under the rules that we’re required to follow, P&L, on certain derivative contracts in our own stock, depending on the form of settlement of those derivatives, has to be adjusted in calculating the net income for diluted share purposes.

This does not affect our net income.

It does not affect what goes to retained earnings or builds our capital base, but is exclusively for the purposes of calculating this effect.

This quarter, there were some gains on those certain contracts.

And we had to exclude them from the numerator.

The effect of that exclusion was to reduce diluted EPS by €0.22 from what it otherwise would have been.

And, as you can see, we are reporting €2.17.

The contracts in question have expired, and we do not see this as a continuing phenomenon.

Moving to page six, on pre-tax earnings, as you can see, up 32% over the prior year.

And this has been, as I said before, in challenging markets, but likewise in a period of weakening U.S. dollar.

And because we report in euros, that does have an impact.

Moving ahead to page seven, our net income is up 29% compared to the second quarter last year.

And for the first full six months, 43%.

The tax rate this quarter was 34%, which is an increase over 33% in the second quarter last year.

However, we still reiterate our guidance of the 36% expected tax rate.

Moving to revenues, they were higher in this quarter, at €6.8b, than in any quarter in 2005.

And this is despite the shift in exchange rates that I talked about.

One effect we have seen in the revenues, and you will see this later in some of the details, is in our Corporate Investments segment, as you know, we have been on a program of de-risking that portfolio.

And so we have sold some positions since the second quarter last year.

The principal positions were shares in Daimler, although we still hold a number of shares.

We sold some.

And the second quarter is when dividends are paid.

So our dividend income from the Daimler shares is down.

Likewise we divested our share in Eurohypo.

That also we had no equity pick up this quarter.

The impact of these two items, net of the carry -- the funding cost that we assumed, was almost €100m.

On the costs, we continue discipline on containing costs.

At €4.8b, that’s up €500m from the prior year.

But, as you can see, all of that is in the comp line -- principally in the comp line.

And that’s consistent with the improved profitability of the Bank, although down from the first quarter which shows the responsiveness of that comp line in our accrual discipline to changes in expenses in P&L.

On the non-comp side, we’ve -- and these are the stickier, more difficult costs to -- not as responsive to revenue changes, for example.

At €1.7b are up slightly from the prior year.

But as you can see the trend, they have been contained.

In this quarter the principal drivers of the non-comp costs compared to the second quarter last year were marketing and promotion costs and investments in our businesses.

As a result, if you look at the ratios on page 10, our cost/income ratio, at 71, is lower than any quarter last year, except the first quarter, down slightly from the first quarter this year.

But, as you can see in the analysis at the bottom of the page, our comp ratio has remained at 46%, reflecting a disciplined approach on the bonus accruals.

But the non-comp has gone up, not because -- the ratio has gone up, not because of the cost increase, but rather because of the reduced dividends -- the reduced revenues.

Moving onto page 12, into segment results.

We have had some substantial increases in both CIB and PCAM compared to the first quarter last year.

And, as you can see, our Corporate Investments number was down €88m.

And most of that, or more than that, was affected by the Daimler and Eurohypo positions that I talked about earlier.

CIB profits were up at €1.415b. 65% from the prior year.

Our cost/income ratio continues below 70%, at 69%.

And our ROE at 33%, very strong.

I will talk more about the pieces in the next pages.

We look at our sales and trading debt results, €2.387b which, by any measure, is an outstanding quarter, down slightly from the first quarter which was a record quarter.

However, the -- we normally expect a seasonal fluctuation from the first quarter.

And the reduction this quarter was 16%.

And that is lower than what we had experienced historically.

For example, in the prior year the second quarter was 31% below the first.

The quarter reflected the strength in our Distressed Debt business, which is part of our Intellectual Capital Structuring and Complex Solutions business.

In emerging markets debt we showed a reduction, although still a positive quarter from the prior year.

And this was due to both the volatility in the market and widening spreads in May and June.

If we turn to equities, our revenues for the quarter, €743m, are up 23% year on year.

However, as you can see, they are down from the first-quarter record number of €1.567b.

The major reason for this decline is the poor performance of our dedicated Equity Proprietary Trading unit.

As we indicated in the first-quarter call, the results of that quarter saw favorable market conditions, resulting in a very strong performance for that unit.

In the second quarter, we gave back some of the gains from the first quarter, the trading gains and, in fact, produced a small trading loss.

In order to give you a clearer picture of the performance, we thought it would be helpful to provide you with the comparative effects of the Equity Proprietary Trade results of the Equity Proprietary Trading unit for the first two quarters.

Let me share some numbers with you.

In the first quarter of 2006, the unit registered profits of just over €400m.

So €400m of the €1.567b, just over €400m was a result of the Equity Proprietary Trading profits.

In the second quarter, against the backdrop of significant corrections in equity markets, that unit recorded a loss of less than €100m, but not too far below €100m.

As a result, the swing was €500m in reduced contribution from our Equity Proprietary Trading unit from the first to the second quarter.

However, for the year, for six months, the result of the unit is still exceptional, with over €300m in first-half profits.

By comparison, in the second quarter of ’05, the unit generated profits of just under €50m.

Excluding the results of this unit, the Proprietary Trading unit, the 2006 revenues from our customer-oriented businesses, and as you can see on the right, equity derivatives, prime services, cash equities, declined by less than 30% from the record levels in this year’s first quarter, but increased by almost 50% over year on year.

The message we’d like to communicate to you is that there was a substantial swing in equity proprietary trading.

We’re very pleased with the results in equity derivatives, prime services and cash equities, all three of which posted very substantial returns and it underscores our confidence in that model.

Moving to our Corporate Finance businesses.

The first, Origination.

As you can see on the slide on page 16, we generated record quarterly revenues in the period.

These came primarily from debt origination, which showed a substantial increase across our high-yield and syndicated loan and investment grade origination business.

ECM posted robust revenues.

But the growth and the size was less than the debt.

The Debt Capital Markets also showed a strong recovery from the second quarter of ’05 in the wake of the automotive credit downgrades and the resulting turbulence in the credit markets last year.

On Advisory, our Advisory revenues €156m for the quarter, up 8% from the second quarter last year, but lower than the first quarter.

But most of that is due, or we think that’s due to the timing of closing of transactions because our pipeline is still strong and the volume of announced deals is rising in the market.

During the quarter and during the half year, we participated in four of the top 10 transactions.

And in the second quarter we did about half of this.

But again, the pipeline here is strong and that’s an important factor for us.

GTB is turning in -- has turned in again record results -- strong results for the quarter, €204m.

And that’s both driven by the top line as well as continued discipline on the cost base.

As you can see, our cost/income ratio has fallen again to 65.

And the ROE is up at 77%.

This business has gone through significant change over the last several years.

And we are now in a position where our cost/income ratio, we believe, is best in class and compares very favorably with our global peers.

We would caution you, though, not to extrapolate the first-quarter results, but we continue to have -- the second-quarter results -- first-half results, but we continue to have great confidence that this business will make considerable contributions to our future profitability.

In PCAM, profits -- pre-tax profits for the quarter up 32% from the prior year, at €490m.

Our cost/income ratio moved up slightly, but still trending down from the historical levels at 75%.

And we’ll talk about the components of that business on the next page.

Asset and Wealth Management, on page 20, shows a considerable improvement year on year.

The principal driver has been, in this quarter, was performance fees.

These are not gains on sales of assets, but performance fees we earn on assets that we manage in the Real Estate Asset Management business.

However, we also saw strong performance again from our DWS mutual fund asset management unit.

In the second half of 2005, showed sizable improvement over the first half.

And I just want to caution you that this is not a seasonal pattern.

But the results in the third and fourth quarter last year were driven likewise by performance fees and gains in the Real Estate business.

With regard to PBC, the results for the quarter were pre-tax earnings of €281m, up 14% from the prior year, with growth in all revenue lines in the business and, at the same time, making investments in mature -- in our mature markets, for example, Germany and Italy.

But likewise looking to build in emerging markets, India and Poland, for example.

Turning to page 23, you can see that our problem loans have come down again.

The credit environment has been benign.

However, our credit risk management department is doing a very diligent job in looking for recoveries and working through problem loans.

And we’re down to €3.5b, which is the lowest level in five years.

Our problem loan ratio to total loans is 2.1, which is down slightly from the prior quarter.

And our coverage, as you can see, is 51%.

Turning to provisions for the quarter, €78m in total.

And as you can see at the bottom of the page, those consist of continued recoveries, although at a lower level than the first quarter in CIB, and an increase over the -- slight increase over the first quarter in our PCAM business.

But that comes principally from growth in our Consumer Loan business which is a stated strategy that we have.

Our Tier 1 ratio, down slightly at 8.7%.

And this is due to a series of factors.

One is the increase in the RWA, as you can see, at €263m.

The share buyback program.

We bought back €12m more shares during the quarter.

And that has reduced the Tier 1 capital.

And those have been offset by retained earnings and other factors.

To turn to the next page, we talked about capital strategy.

And there’s several points we’d like to make here.

As you saw in the quarter, we announced two acquisitions.

And we continue to make investments in organic growth.

So we’re looking to grow RWA.

We’re looking to grow the top line of our business, as long as it makes strategic sense and the numbers demonstrate that it will produce attractive returns.

And we have used this chart in prior presentations.

And we repeat it here again, merely to demonstrate the levers we have on the right-hand side for managing the business, making strategic decisions, but yet, at the same time, recognizing the need to maintain our capital strength.

And two points we’d like to make here.

First, there have been some questions as to what impacts conversion to Basel II would have on our capital strategy.

And we continue to make calculations as to what our results would be.

We’ve had discussions internally and with the regulators on approval of methods.

And, based on our current calculations, we expect that the Basel II capital requirements would come out below those under the current Basel I framework.

The second point and another lever is dividends, that we would like to address.

Although for U.S.

GAAP we don’t accrue dividends, in calculating our Tier 1 capital we do make an assumption and exclude those during the year so that the effect is not pronounced at the time that the dividend is paid.

This year we adopted a new method of accruing the dividends for that purpose.

And that is to assume a payout ratio on our earnings per share.

And this year we assumed that that would be the same as last year, or 36%.

So through the first six months of the year, we have accrued approximately €1b of deductions from our Tier 1 capital, which is about €2.00 per share, and that compares to the €2.50 for the full year 2005.

And this is consistent with our stated objective to steadily increase the dividend over time.

We said this -- we announced this at the AGM.

And we have consistently followed that practice.

Any decisions we make, and we’d just like to reiterate this, on acquisitions, on share buybacks, on dividend policy, are taking all the factors illustrated on this page into account so that we have an integrated decision process, with the objective of assuring that we can grow in healthy segments in the business, and yet maintain our capital strength.

With that, I will end my formal presentation and open it up for questions.

Thank you, Tony.

Vicky, would you take over please.

[OPERATOR INSTRUCTIONS].

The first question is from Mr. [Olof Keiser], [LRP].

Please go ahead, sir.

Yes.

Hello.

It’s Olof Keiser from LRP.

I was wondering if you could tell us a little bit more about the loss in prop trading.

Would you describe this more or less at normal in a difficult situation we had in Q2, or would you say it’s a kind of extraordinary effect?

I don’t know that I’d use the word even normal or extraordinary.

Our Proprietary Trading unit takes on risk.

The purpose is to use our own capital to find opportunities in the market.

If you do that, you have to expect that, at times, there will be positives and, at times, negatives.

We are very pleased with the performance of that unit overall.

And, as I indicated in my prepared remarks for the six months, that unit still produced a very substantial gain of €300m.

So I don’t know, again, that I’d call that normal or extraordinary.

But it’s just a phenomenon of having a Proprietary Equity Trading business.

Okay.

Thank you.

Thank you, Olof.

The next question is from Mr. Matthew Clark, Keefe, Bruyette and Woods.

Please go ahead, sir.

Good morning.

I’ve got a couple of questions.

Firstly, again, on the Proprietary Trading.

Was the Proprietary Trading loss in equities due to a single strategy, or was it several strategies that were disappointing this quarter?

And also in the past, I think Deutsche Bank said that around 10% of its overall investment banking trading results was due to pure proprietary trading.

I’m just wondering whether, for the investment bank as a whole in the first half ’06, it was still around that level or if it was -- it drifted above that level.

Second question, just on the Asset Management division and the real estate fees there.

You said that they weren’t seasonal.

But if I remember rightly, the strength from real estate performance last year was reported in the other line rather than the asset management fees line.

Could you just talk about why sometimes performance fees might go into the asset management fees line, sometimes into the other line?

And just about when these occur, whether -- because with most hedge funds it’s a year-end event.

Why is it different for real estate funds?

And then third question, just on Basel II, what the drivers are for your expected lower capital requirement.

Is it just the benefit of the retail exposure lowering the weightings there or are there other major drivers there?

Thank you.

Okay.

The first question as far as the Equity Proprietary Trading, it was not a single strategy.

So it’s not something that we set out to do in one area that created the effect.

With regard to the proportion of our trading profits from Equity Proprietary Trading, the number that we’ve normally given guidance was closer to 20%.

It was about 20%.

In the first quarter this year, you can do the math, it was above 20%.

If you look at the full six months, it was less than 20%.

So over the cycle we’d look for a number at about 20%.

With regard to the asset management, there are two forms of revenues or several forms of revenues.

But the two I’ll focus on in this answer are performance fees and sales of assets.

In the first quarter this year and in some of the periods last year, the revenues came from the second as well as the first, but the sale of assets.

If we own real estate properties in that business and we sell them either into a fund or generally into the market to a third-party buyer, those go in the other line.

If the -- by contrast, if the revenue comes from an override on the profits from the assets we manage, rather than the assets we own, then the latter is reported in the [B] line.

And that is what happened this quarter.

With regard to Basel II, one of the changes and the principal objective behind Basel II versus Basel I is to create more of a risk-base approach.

And there’s three levels of methodologies that can be used.

The methodology that we would propose or that we have proposed is the advanced approach.

And this puts greater sensitivity on both -- on the trading as well as on the loan positions with regard to how the risk inherent in those positions is measured for capital purposes.

So it’s not retail versus any other business, but rather the effect of a change in the measurement of the capital that’s necessary to support risk positions.

Okay.

Can I just come back to the asset management performance fees, the overrides, as you described them?

Is there any particular seasonality to when you asses whether the valuation of your funds are ahead and hence whether you get the benefit of those overrides, or does it just happen fairly haphazardly when valuations of the portfolio take place?

I’m sorry, I didn’t answer that question you asked about the year end.

Normally these don’t come from mark to markets on positions, but generally from realization of gains.

Although in some cases, depending on the individual contracts with the investors, they may come at different times.

And these are earned at the same time that the investors earn their returns.

And, as fiduciaries, those have to be taken when the managers feel it’s appropriate and prudent to do so.

Okay.

That’s great.

Thanks very much.

Thanks Matthew.

Next one, please.

The next question is from Mr. Kian Abouhossein, JP Morgan.

Please go ahead, sir.

Yes.

Hi.

The first question’s related back to prop trading.

First of all, thanks for the details you’ve given.

But it would be great if you could indicate maybe if there has been specific areas of the equity business which were affected, or specific regions.

And how do you manage your proposition?

Do you close them if you meet a certain limit or do you keep on running the propositions?

The second question is related to page 38 of your results regarding [FIN46R].

You talk about structured finance and other aggregate assets of €90b and you have an exposure of €1.2b.

And it looks like your exposure has doubled.

I’m just trying to understand, is this related to, for example, SPEs where you have the [LL] structures in your books, for example?

Or what are these structures that you’re putting on?

And the third question’s on Tier 1 ratio, where you indicated you would have an improvement between Basel II and Basel I. Could you maybe quantify a little bit what the improvement could be?

Thank you.

Okay.

As far as the prop trading, I don’t think it’s in a specific area, not to my understanding.

The markets were not very favorable.

We managed and hedged the positions as best we could.

But if you’re taking risk in a market that acted like it has in the second quarter, you do have potential.

And so it’s not a specific area.

As far as closing the positions and limits, yes, we do.

We have consultation with people to the top of the pyramid, in terms of sales and trading.

Decisions are made with a perspective of where the managers believe the potential and the positions are, the conditions in the market and with regard to how much risk we’re willing to take.

To move in and out of positions without regard to those other factors is probably not a prudent approach, but we do have discipline.

We do have consultation on a regular basis.

With regard to the Tier 1 ratio, I don’t know at this point that I’d want to quantify what the effect is, except to say that we don’t see a decline in the ratio.

With regard to the SPE question, I’m not sure that I followed it all, and I apologize for that.

And maybe we’ll just take that offline with Investor Relations?

Yes, that’s fine.

Kian, can we take this offline?

Yes, of course.

It’s too technical.

Thank you for your understanding.

That’s it.

Shall we move on?

Thank you.

The next question is from Mr. Jeremy Sigee, Citigroup.

Please go ahead, sir.

Thank you.

Just a couple of minor questions please.

Firstly, Corporate Banking and Securities, the other products revenue line was a bigger negative than in the last few quarters.

I just wondered if you could comment if there’s anything specific going on in there, what the driver was of that swing.

Secondly, your net new money report, on slide 42.

Slight outflows in the asset management area.

I wonder if you could talk about whether that’s attributable to any particular product or causes, what you’re finding your investors doing.

And also, specifically, when you think we might see the end of outflows in the Americas unit.

Okay.

With regard to the other products number, the increase -- the number reported was €130m.

And there are several components in that.

The most constant one is -- that’s where we put our goodwill funding costs.

That number, as you can imagine, is going to fluctuate with interest rates.

And that has increased somewhat over the second quarter last year, but is about flat with the first quarter.

The other factors that go into that category are CIB-related equity compensation costs, and that includes SARs.

So with the rising share price you’re going to see an increase there.

And there was one adjustment in one internal position.

But that was not a material effect.

So, the principal components of that €130m, more than €100m of it was attributed to goodwill funding and some of the equity comp components, including cost of funding, a very specific technical requirement under [SFAS 150] to categorize some portion of dividends as interest expense.

As far as net new money is concerned, the growth -- we’ve seen growth in the quarter in the Private Wealth Management unit.

However, we continue to see outflows in the Americas.

And those are coming both from the Scudder retail piece, as well as institutional.

And we are working -- asset management is working very diligently to deal with the problems there.

We unfortunately still have not concluded on the market timing investigation with the FCC.

We’re working very closely with them, and very supportive -- cooperatively with them.

And we’re looking to get that resolved.

So I don’t know what more I could add to that.

Okay.

Thank you.

Thanks Jeremy.

The next question is from Mr. Joachim Mueller, Cheuvreux.

Please go ahead, sir.

Yes, good morning.

Joachim Mueller, Cheuvreux.

Two questions, please.

One is on the economic capital usage.

Could you provide maybe with some -- with an update on the progression for the economic capital that’s allocated to market risk, I think it was €3b at the end of last year?

And if -- Maybe you could split that up even into trading and non-trading capital?

And then secondly, just in case I missed it, the performance fees on the real estate side.

Could you tell us how that -- what the contribution was, and how that changed versus second quarter last year?

Thank you.

Okay, the economic capital effects.

Let me just go -- okay.

On the economic capital we saw a slight decline overall.

On the economic -- On the market risk piece likewise a slight decline and decline on the credit piece.

In fact, we saw decline across all categories.

Economic capital for the quarter was €11b, just under €11.5b, as opposed to €11.9b for the first quarter, and €12.2b for the end of last year.

And the market risk, as I say, all the categories dropped slightly.

So market risk went down from 2.9 to 2.5, so that is not a major change.

As far as the performance fees, in the second quarter last year, my recollection is we didn’t have any performance fees.

In the third and fourth quarter last year we had a combination of performance fees, as well as gains on sales.

And so the major driver, as we said earlier, of fees in the asset management area were from performance fees in this quarter.

These don’t come in on a regular timed basis but rather when they happen.

I think it’s important to emphasize though, these are not one-offs as one would look at sales of assets -- gains on sales of assets.

The business model and quality of earnings from this business model is that you would have performance fees, and we believe our guys are very successful and very strong in selecting and managing properties.

So we’d expect to see these but you wouldn’t see them on a regular quarterly basis.

They would come in, as we said earlier, when the managers believe it’s prudent to take the gains on behalf of the investors.

Thank you.

The next question is from Mr. Richard Ramsden, Goldman Sachs.

Please go ahead, sir.

Yes.

I just have a quick question on your retail strategy in Germany.

From your acquisition of Berliner Bank, can you talk a little bit about your ability to grow in Germany further via acquisitions?

And if you could talk specifically as well about transactions multiples in Germany and how you see those changing?

That would be helpful as well, thanks.

Yes.

First, and we have some slides at the back of the presentation, we’re very pleased with the Berliner Bank acquisition.

I think it gives us a much stronger foothold in terms of market share, in terms of branches, in terms of customer reach in Berlin, which is a very critical and important market in Germany.

The way we see our business developing in Germany, is with continued emphasis on growing the consumer finance segment of the business.

The current business is targeted towards the more affluent customer base, with a focus on not only the traditional loan and deposit businesses, but also the investment management side, sale of securities and other investment products.

The portion or the segment where we would like to grow the business is in the consumer finance and in the real estate business.

We believe that we can reach that market.

We believe that the spreads and the yields on those deposits, on the loans, are strong.

With regard to multiples, the Berliner Bank acquisition came in at a higher multiple than we believe will be achieved with synergies and a combination in our business.

We -- our forecasts and our plans in terms of integration and actions that we look to take in that business, forecast in three to four years a multiple there of closer to nine times earnings.

That’s okay?

Yes, that’s great.

Thank you.

Thank you.

Next please.

The next question from Mr. Stuart Grant, Merrill Lynch.

Please go ahead, sir.

Hi, I had two or three questions, please.

Firstly on Germany.

At the Q1 stage you said that revenues were up 9% year-on-year, would you have a similar figure for the H1 stage, please?

Secondly, that slide you gave on capital discipline, that’s very helpful.

Just looking into the second half, obviously you’ve bought a couple of things now and you're going to have goodwill associated with that.

Should we assume lower share buybacks in the second half, or do you have plans to shed risk rated assets to keep the buyback going at the current level?

Then the third question, quite technical, just going back to what you said at the beginning, that €0.22 adjustment to the EPS.

That sounds like then €100m adjustment.

Is that a Q2 income from your own shares, or is that a first half figure?

And does that get reported in equity sales and trading, or presumably it goes in the Group center revenues I imagine?

Maybe just elaborate on that?

Thanks.

Yes.

Let me start on the second and then third and then I’ll go back to the first.

The share buyback, if you go back to that chart on page 26, as we said in the past all of the right hand side are levers.

It is difficult and probably not productive for us to swing risk rated assets around quarter-to-quarter to achieve capital ratios.

So with the acquisitions that we’re making we see some effects on the Tier 1 ratio.

And our expectation is that rather than begin reducing risk rated assets, we probably would moderate the share buybacks and use those as the balancing effect.

With regard to your last question of €0.22, and I don’t know how much detail you want to get into, but in most of these positions we’re hedged.

And if -- And we create positions to satisfy both our own objectives as well as those of our customers.

And the technical effect is that if a derivative is settled only in cash, then that’s not considered an equity instrument.

So there is no adjustment to the net income, the numerator of the diluted EPS calculation.

If on the other hand, it can be settled either in cash or in physical form then it has -- it is deemed to have attributes similar to equity, our own shares.

And so that the number that you -- the €100m that you’ve said is close to the effect but what happened is, there's an asymmetrical.

This is not quite SFAS 133 asymmetry, but is the -- it -- you -- theoretically you’d think that you'd either adjust or not adjust both sides.

So what happened is the loss -- the other side -- if we had a gain that was excluded, the other side would have been a loss.

Because of the loss leg on balance was on cash settled that was not excluded, because the gain leg had equity -- was deemed to have equity attributes which we didn’t see it does, that is excluded.

So the €100m is not the full effect of the strategy on these derivatives, but rather the exclusion of one leg because the two legs were not symmetrical.

So in your P&L it’s zero but in the accounting for the diluted EPS it’s €100m.

Is that right?

That’s correct.

Zero is probably a stronger statement than I would make because there probably is a difference, there is a spread.

Right, yes.

But it does not affect net income.

It’s in the sales and trading results, and it’s just a technical adjustment on that.

As far as the revenues in Germany, the second quarter ’06 compared to the second quarter ‘05 shows an increase of more than 10%.

So you’ve got it accelerating basically?

Yes.

Good.

Thank you very much.

Assisted with our growth in the consumer loan book and in other parts of the business.

Sure, thanks.

Thanks, Stuart.

You're welcome.

The next question is from Mr. Georg Kanders, WestLB.

Please go ahead, sir.

Yes.

First I have a question regarding the performance fees in the asset management.

Without these fees would the fee income in asset and wealth management be below the number in Q1?

And the second question I have, what are the reasons that you won’t extrapolate the result of GTV?

Are there some unsustainable factors in the revenues in Q2?

The third question I have is on consolidation and adjustments.

You mentioned that a big difference is due to accounting asymmetries.

What percentage of the negative revenues in consumer consolidation and adjustments is due to this factor?

Okay.

First in terms of performance fees and revenues.

In the first quarter of this year performance fees were lower than in the second.

By the same account, there were gains on the sale of assets which don’t go in the performance fee line but do go into the asset management revenues, and so that was the main effect.

As far as GTV, I was not trying to signal a one-time effect but there is some fluctuation in flows in any business, and I was trying to focus on this quarter.

That was not a forecast of where things would be or a forecast of where things would not be, but just the effect.

And the third question on consolidation and adjustments.

The principle effect this quarter, and we went from a gain in the second quarter last year about €130m -- €100m in the -- that segment, to a loss of about €130m.

In the current quarter the major -- that’s on an underlying basis.

The major effect is the asymmetry on SFAS 133 and that number, depending on how we’re positioned, a lot of this volatility arises from our finance -- our debt issuance activities.

So depending on the what -- the way interest rates move and the way our debt, a lot of it is short and intermediate - not short-term but intermediate-term - that could drive it.

So we had an increase in the number of positions not eligible for hedge accounting this quarter, as compared to last quarter.

Depending on the nature of the positions we hedged some, we can hedge some and we can’t hedge others, so there is some volatility there.

In addition to that, in the second quarter last year we had some corporate interest, positive corporate interest in the segment.

That arose because we allocated interest, more interest to the businesses than we incurred.

And that happened because of the way we give credit to the businesses, for the portion of their funding generated from equity.

And depending on the way interest rates move, because we do this based on an analysis of how much of our equity is in dollars, how much of our equity is in sterling, how much of our equity is in euros and in other currencies.

And depending on the direction of interest rates in those particular markets, the blended effect can sometimes create differences.

So if you look at the €100m gain from -- in the second quarter last year, that element drove most of that activity.

During this period -- during most periods the net interest does not generate a gain -- interest allocation does not generate a gain in consolidation and adjustments, and it didn’t this quarter.

However, the fluctuation on the non-hedged eligible positions was higher.

May I come back to this first question?

What I ask is, was it -- without these performance fees, would the performance income in asset and wealth management be below the number recorded in Q1?

Let me just look up --

Do you mean the performance income or the total income?

The total income --

Total income.

-- without these performance.

No, only the fee income.

Only the fee income?

Alright.

If you look at the financial -- I see it, the financial data supplement.

The increase from the first quarter to the second quarter is just about the number of one of the performance fees.

So if you took out the largest of the performance fees in the second quarter, the portfolio and fund management revenue line on page 12 in our financial data supplement would be about flat with the first quarter.

Well, this is for the largest companies.

How many companies were there?

There were a number of them but one was predominantly -- represents predominantly all of the effect.

Okay, thanks.

Thank you Georg.

Let me make a quick statement.

I was told by the moderator that we have several participants waiting to place a question.

We are prepared to continue the call beyond 10 o’clock because we have started delayed.

But may I ask everybody to ask one short question and then we move on.

Thank you.

Next please.

The next question is from Mr. Carsten Werle, Oppenheim Research.

Please go ahead, sir.

Yes.

Carsten Werle at Oppenheim.

Good morning.

So we have then one question.

Perhaps related to your M&A business, I think you already showed in the first quarter that you see quite significant pipeline.

When would you actually expect this to be visible also on the P&L?

We see that revenues from advisory are actually down sequentially.

Is this more a Q4 expect -- effect that we should expect there or when would you actually expect this to be visible there?

I wish I could forecast that with any degree of certainty but we have no control over when positions.

Now, I should point out in -- that both in origination and advisory the markets, as well as individual managements, are going to determine when these occur.

So whether it’s third quarter, fourth quarter, I don’t think I’d be in a position to forecast that.

But I can tell you that the pipeline is strong and we anticipate that they will close.

Okay, thanks.

Thank you Carsten.

Next please.

The next question is from Mr. [Philip Seashank], UBS.

Please go ahead, sir.

Hello.

A quick question on non-comp costs.

Please the €1.7b you had in the first quarter as well in the second quarter, excluding the restructuring charges.

Could you just comment on sustainability and how much they fluctuate, in terms of business volume?

So should we expect if volume goes down through the summer, say, in the third quarter, that this number could drop?

And could you also comment, I believe there are about €80m restructuring costs on Scudder in there, whether they are accrued, pro rata or how the accounting works there, please?

Yes.

With regard to the non-comp, the major components of non-comp are not going to fluctuate with volumes.

So occupancy costs, technology costs and the like are fairly sticky.

The items that are going to fluctuate would be deal costs if they're not charged back to the deal, marketing costs, travel costs, legal costs and those activities.

We generally see a decline in some of the activity in the quarter, in the summer quarter, so we may see some decline there.

Likewise fees we pay to outsource providers of services also -- so clearance services, for example, also go in that category.

So to the extent that our contracts are variable priced and volumes decline, we would see some decline.

With regard to the Scudder costs, the €80m is a forecasted number.

We euphemistically call that restructuring but it is not technically accounting restructuring.

Only a small proportion of it is because it has to comply with the rules.

That would not be spread pro rata.

Most of it, as I said, will not be in the restructuring line but in the other lines of operating costs.

I don’t remember how much is forecast for the third or fourth quarter but we -- and we will see a part of it deferred into next year as well.

Thanks.

Okay, thanks Philip.

The next question is from Miss [Joanna Naylor], Lehman Brothers.

Please go ahead, madam.

Hi, good morning.

I just wondered in view of the acquisitions and some other stuff that you’ve been doing in Europe, if you could comment a little bit on your strategy going forward in mortgages?

Do you still see yourself underway, relative to where you want to be in terms of your capabilities in the U.S. and in Europe?

As far as the U.S. is concerned, we have made -- announced two acquisitions this year.

A small one, as you know, in California and the most recent MortgageIT.

I think we’re going to look to digest particularly the second one, this is a unit of more than 2,000 employees with 40 to 50 offices, I forget exactly, across the United States.

It’s a very strong business, it has a very good franchise and a very good name.

And we believe it will help fill our pipeline for the securitization businesses in the U.S.

So again, I wouldn’t say that there isn't going to be another one or there is going to be another in the U.S.

But I think our focus now is in integrating this one.

With regard to the activities in Europe, we have not made any mortgage origination acquisitions here, and we always review what's in the market and our strategy.

And that activity is growing and is a good activity in many countries in Europe.

So -- But we study opportunities and look at what's out there.

Okay.

Thanks, Joanna.

The next question from Mr. Kinner Lakhani, ABN Amro.

Please go ahead, sir.

Yes, hi.

Yes.

Could you quantify the dependence on prop trading on the other side of the equation, mainly the fixed income business?

The number, the percentage is lower than has been traditionally, and our objective is to have it lower over the cycle than the equity.

Thank you.

You're welcome.

Okay.

Next please.

The next question is from Mr. Dieter Hein, Fair Research.

Please go ahead, sir.

Yes, good morning.

My question’s regarding your acquisition strategy in the German retail business.

Why did you decide to make a bid for Berliner Bank and not for the bigger Bankgesellschaft Berlin, which is for sale next year as well?

We found that the opportunity that was available with Berliner Bank was attractive.

It was something that was -- we felt we could absorb and integrate.

Its focus was on the affluent client base which is more consistent with the rest of our business, and we felt it was a good fit.

So you are not interested to get a footstep into the Republic banks in Germany?

I think I’d just would say what I just said.

Okay, thank you very much.

Thank you, Dieter.

The next question is from Fiona Swaffield, Execution.

Please go ahead, madam.

Hi.

Just quickly on the dividend.

You mentioned you were accruing at a 30% -- 36% payout.

I think recently the previous CFO did mention the long-term aim to go up to 50%.

Is that still the thinking or, showing us slide 26, is it too early to say and it just depends on what happens on acquisitions?

Thanks.

I think our objective is to steadily increase it over time.

We’re currently accruing at 36%.

We want to retain flexibility to make strategic decisions, and I think we study it very carefully and we’ll be very disciplined in our approach.

For the current time I think we’re accruing at 36%.

As our CEO indicated at the AGM that he would see that gradually increasing, and we just stand by that statement.

Thanks.

Thanks Fiona.

Next please.

The next question from Mr. Michael Rohr, Main First Bank.

Please go ahead, sir.

Yes, hi, good morning.

It’s Michael Rohr, Main First.

Just a quick one on the PCAM growth driver from page 46 of the presentation.

What pops up here is a strong growth in Italy, retail mortgages up 30% over the period last year.

Actually, given that the penetration mortgage is pretty low in Italy, wouldn’t this be very attractive to grow externally here as well?

If you can give us an update on your thoughts here in Italy.

Thank you.

I can answer that, not only for Italy but everywhere else.

We would look to grow externally.

I'm assuming you mean by acquisition?

Yes.

But we have to look at prices, we have to look at values.

We have to look at when the acquisitions are going to return our hurdle rates in terms of ROE, in terms of impact and other factors.

So we would look to grow externally.

However, we would only do it if we could make sense financially from the results, if not on the day of the acquisition but within a relatively short period of time.

After that we will continue looking at organic growth, both in Italy as well as in other locations.

And as you can see, we’re not reluctant to make acquisitions.

Berliner Bank and MortgageIT are just two recent examples, when we believe they fit our strategic model, and we see a return consistent with the hurdles that we would set.

Okay, thank you.

Thank you.

Is there one more?

The last question from Mr. Christopher Wheeler, Bear Stearns.

Please go ahead, sir.

Yes, good morning.

Very, very quickly, just another question related to the strategy in Germany, in the domestic banking strategy.

You touched on, Tony, the concept of focusing on consumer lending.

I seem to have heard this for the last three or four years from both yourself and your competitors.

And I'm just trying to understand whether or not this will ever really happen, and what is it that’s going to drive this growth in consumer lending?

Because my impression is it will still need something, which perhaps is an industry which has not been desperately buoyant, shall we say.

What do you think is changing in terms of either your ability to actually get the loans away, or indeed consumers actually looking to borrow more money from the -- their banks?

I think if you look at the slide on page 46, you will see that we have been making success and headway in the development of that business.

We would look at both doing that organically and otherwise.

We believe that both demographics, as well as the confidence levels in Germany, indicate opportunities in that area.

Why it hasn’t happened is because the market is competitive.

And as I repeated, as I said earlier when the question about Italy and mortgages came up, that if we can’t make financial sense of it we would not do it.

We've introduced a series of programs over the last two years of penetrating that market, and we have some additional programs that we’re ready to make as well.

But if you look at our progress in this regard, we’re up 8% in revenues in the PBC, in the PCAM businesses, in the loan and deposit area.

And we've put those together because one is funding the other, and that’s on year-on-year.

And we’re up 9% compared to the second quarter last year in the current quarter.

So we believe that it is beginning to show results, and we've introduced marketing programs, we’re looking at new products, affiliations, to build that business and expect to get there.

Okay, thanks very much.

Thank you Christopher.

And on that remark we are closing the deal -- we are closing the call and Tony was a very good deal, I think, in your presentation.

Thank you very much for your time and I think also on your behalf, thank you all participants for your interest in Deutsche.

And if there should be any follow-ups, I think you have our telephone number.

Thank you.

And thank you very much.

Good bye.

Ladies and gentlemen, the conference call is now over.

You may disconnect.