Deutsche Bank AG (DB) 2006 Q3 法說會逐字稿

Good morning. This is the Chorus Call conference operator. Welcome to the Deutsche Bank publication of figures for Q3 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, and good morning from Deutsche Bank. Welcome to our third-quarter call which will be performed by our CFO, Tony di Iorio who is with me. After Tony's presentation we will have, as usual, sufficient time to answer your questions.

This call is supported by a set of documents you are used to, our earnings release, the interim report as of September 30, the full financial data supplement and the flow of PowerPoint slides which we will refer to in this call.

And, with this, Tony, I hand over to you.

Thank you, Wolfram, and good morning ladies and gentlemen. And thank you for joining us for this call.

Moving right into the presentation, the PowerPoint slides, page three. We reported this morning net income of EUR1.2b for the quarter, which is record for a third quarter for Deutsche Bank. This quarter produced very solid results relative to the third quarter of last year and relative to our performance in other quarters.

I would comment that the third quarter last year was atypically strong for a seasonal summer quarter, which we've mentioned before. 2006 is a more typical seasonal pattern which is typified by lower market volumes, particularly in Europe in July and August. This seasonality was compounded in the wake of the corrections, particularly in the equity markets in May and June.

Of notable point in the quarter, PCAM invested assets grew by EUR35b, of which EUR13b was net new money. This is a very important statistic and metric for us. If you go back to our Investor Day presentations, invested assets both in our -- not only our Asset Management business, but also our Private wealth management business are very important for us.

During the quarter we continued making investments in our platform, and I'll talk to you about that more in a little bit. But nevertheless, we maintained cost and risk discipline. Our ROE and diluted EPS growth is on track versus our targets. And we comment that our profitability and diluted EPS through the nine months already exceeds the 12 months last year.

And this is shown on page four, where you can see that our ROE in the third quarter was 26%, which exceeded our goal, our target of 25%. And this is on a target definition, so it excludes the gains on industrial holdings and restructuring costs. For the year to date, we're at 32% ROE.

Notably, our earnings per share for the quarter, on a diluted basis, was EUR2.45. And I would comment that this is almost equal to the dividend we paid in 2005, and for the year at EUR8.11.

Speaking on dividend, we have assumed, and I'll talk to you about that later when we talk about equity and regulatory capital, that our dividend payout rate this year will be the same as it was last year, which was 36% of diluted earnings per share. And, of course, we will discuss dividends with the Supervisory Board after the end of the year and make a recommendation for the dividend, which has to be approved at the annual general meeting.

If you go to page six, we show the pre-tax profit which, as you can see from the title, already exceeds 2005. And the number, on a reported basis, is down 5%. But let me just comment on what comprises that.

In the third quarter of 2005, we generated a gain on the sale of some of our Daimler shares in the amount of EUR337m. In the current quarter, we had some industrial [holdings] gains. We sold shares in Linde that we acquired in the quarter through a subscription to a rights offering. And we sold those shares within the same quarter for a gain of EUR92m.

In addition, the quarter reflects the settlement of the final insurance claim, or there may be one final small amount, but this is the bulk of it, from our loss in the tragedy on September 11, in New York, and that amount was EUR125m.

What I'd also comment is that the third quarter last year had some revenues from and some expenses from some discontinued businesses. First, the U.K. and Philadelphia Asset Management business, which both had a gain on sale as well as revenues and some expenses, obviously, that also went away. But also the sale of a small business we had in Holland.

Apart from that, I would just draw your attention to the right-hand side of the chart where our pre-tax income for the year of EUR6.3b is up 23%. What is important is that it already exceeds the EUR6.1b for the entire year of '05 which was a very strong result.

Turning to net income, our net income for the quarter, as I mentioned earlier, was a record for a third quarter, EUR1.2b. And we should pause here for a minute to talk about the effect of taxes on this number.

The tax rate for the quarter was 31%, compared to 47% for the prior year. And there were two factors that led to this decline. In the prior year, on the gains that I mentioned shortly about -- with Daimler Chrysler, we had a EUR337m gain, but a related tax reversal. And we've talked about this in the past. This is a U.S.-GAAP requirement even though there were no taxes due on those gains. But the taxes were EUR300m that we had to reverse.

By comparison, in the current quarter, the Linde gain did not have a tax reversal associated with it. And that was a -- one part of the difference. And the other part of the difference is we settled on tax audits. And the resulting liabilities were lower than the provisions we had made and so that affected it. Compared to the second quarter, our tax rate of 31% in the third, the second quarter this year was 34%.

We turn to net revenues. We likewise see a modest decline of 3%. But, again, there are some factors that we should focus on in assessing that development. The Daimler gain, the Linde settlement, the insurance settlement in this quarter but, likewise, the discontinued businesses from the prior quarter.

And the other point I'd make, which we'll discuss shortly, is we had significantly lower equity prop revenues in the third quarter this year, although the equity prop trading revenues were modestly profitable.

Taking all of these factors into account, the revenues for the third quarter this year were very strong compared to the third quarter of last year which, I said earlier, was atypically -- atypical of a seasonal third quarter, particularly in Europe.

If we look at our operating cost base, on page nine, you can see that the trend reflects a very stable cost base. And I would comment, and I'll give you some details in a second, this includes investments in organic growth, principally new hires which you'll see in a second. Comp is up marginally. And that comes from the new hires. And the non-comp expenses are trending flat.

As a result, if you look at page 10, our underlying efficiency ratios remain stable, with an overall cost/income ratio of 73%, a comp ratio of 45%, and a non-comp ratio of 28%. The non-comp increase -- ratio increase is principally due to the reduction of revenues because, as you can see from page nine and in the details in the financial data supplement, our non-comp costs have remained relatively stable.

The next page will give you some sense of the level of investment we have made in our strategic objectives. In the Investor Day, as well as in the other discussion communications we've had, we've indicated that our goals were to, in phase three, generate profitable growth. And that growth involves organic growth as a principal measure. But this chart will show you where we have hired almost 3,100 headcount full-time equivalents on this chart. And, as you can see, we have hired across the platform, filling in gaps where we see opportunities in our strategy.

I would comment that the AWM number is a net figure of 317. And if you look at the footnote at the bottom of the page, that excludes headcount that was no longer at the Bank as a result of the consolidations of businesses.

Turning to the segment performance, on page 13. The CIB performance, very solid, and we'll get into details of the specific businesses. Revenues were down EUR177m. But adjusted for the reduction in equity prop, as indicated on the right-hand side, the revenues were very strong in a quarter where we saw some slowdown in seasonality, although strong nevertheless.

The pre-tax profits in CIB, EUR1.135b, are down 13%. But, as you can see from the chart, the predominant effect is an increase in costs in the segment. But that was due to the investments, number one, both in headcount as well as in infrastructure. But likewise, there is about a EUR40m swing because of the way we define operating cost base, which excludes restructuring, but includes severance.

In the third quarter of '05 we had restructuring costs of EUR55m and only EUR6m of severance. In the current quarter we had restructuring costs of EUR10m and EUR46m. So the geography of where expenses are recorded accounted for EUR40m of the effect in costs.

If we turn to Sales and Trading Debt, revenues at EUR1.992 billion. A record for any third quarter at Deutsche Bank. And we saw strength in a number of our businesses. Rates and money market experienced increased customer activity in derivatives, particularly in Asia. And strong growth in the U.S. residential mortgage-backed security business, which is a strategic business, both Asia and our RMBS business.

In the credit trading area, we saw strong customer-driven activity. We securitized products, CDOs, and results were supported by a market -- a supportive market environment in this area.

FX trading revenues were lower seasonally as customer activity was lower than in the second quarter or in the very strong third quarter of '05. And in emerging markets, we saw lower activity in Latin America, but continued strength in Central and Eastern Europe, as indicated.

Turning to Equities Trading, you'll see that our revenues are down from EUR1.022b in the third quarter last year, to EUR700m in the current quarters. As I commented earlier, almost all of this reduction is due to lower equity prop trading revenues, although the current quarter was marginally profitable. If you look at the year to date, the results are still very strong and positive for that activity.

Moving on to the other businesses, emerging markets showed strong growth. And what we began to see, or continue to see in this quarter, is benefits from recent bolt-on acquisitions in Russia and in Turkey. Equity derivatives showed strong year-on-year growth. Cash equities revenues were down for the quarter. And this was the seasonal downturn that we experienced in the summer, particularly in Europe. And equity prop I just commented on.

Moving on to our Corporate Finance and Global Banking businesses, origination revenues were up for the quarter, by 2%. And that was despite a reduction in equity capital markets revenues consistent with lower market volumes. According to the [geologic] numbers, the fee pool in the third quarter this year compared to the third quarter last year was down 13%, and to the second quarter, down 28%. Our market share across the three quarters was consistent. And so we held our position. But because of the reduction in the global fee pool, we saw a reduction in our revenues in that business.

High yield and syndicated loans, we showed an increase in revenues in a flat market. And in our investment grade business, we saw a reduction in revenues. But that's the smallest component of the three on a revenue base.

If we look at Advisory, we have had a very strong quarter. It was a record quarter for us, EUR208m. An increase of EUR60m from the third quarter last year. And we saw very good results, a strong quarter in our global business. Increased our market share to 6% from 4.3% in the last quarter. We improved our position in Europe. And in the Americas, which is a sweet spot for us, we maintained our position. Our M&A pipeline is strong. And we recently participated in a very large transaction, the IPO of ICBC in China.

If we move to GTB, another strong profile business for us, you'll see that revenues per quarter up EUR34m from the third quarter of last year, strong revenue growth in our cash management business and in our trust and security services business. And in the latter, we saw growth both in our services for issuers as well as investors. The issuers is the business we do as registrar and servicer for RMBS and similar products, and the investor services revenues are those associated with investor custody.

I should comment that during the quarter we made continued investments in IT. And in -- both in business applications and in other applications, that resulted in increased costs in the business. So those were absorbed, nevertheless resulting in a 25% increase in pre-tax profit over the third quarter of last year.

Turning to PCAM, we had a small decline in the pre-tax profits in the quarter. But, as I mentioned earlier, almost all of that decline was due to the -- can be accounted for by the deconsolidations that I mentioned in the -- the lower revenues, rather, can be attributed to that. But, of course, there were lower costs attendant with that as well.

What we saw during the quarter, and I'll get into this in a second, is lower brokerage fee revenues, consistent with two factors that we experienced in the quarter. The first is the seasonality. The second, our businesses identified a reduction in activity, particularly early in the quarter, following the volatility in the equity markets and in other securities markets during the May/June period. However, that was offset by increase in our loan and deposit revenues. And this is consistent with our strategy, particularly in PBC, to build our consumer finance business.

Costs continue to be controlled. And I'll comment on this, despite the fact that we have hired significant numbers of people in several businesses in this segment.

Return to Assets and Wealth Management, the revenues -- the pre-tax profits are down. The revenues are lower because of the aforementioned deconsolidation. And the cost savings in asset management, particularly from some actions that that business took in the latter half of last year, were offset by investment spending.

I should comment that we saw in the business continued asset inflows, net new money, in Private wealth management. In the last year, we have hired 350 people in the Private wealth management portion of this business. And the effects of that are demonstrating themselves in two respects in these results. The first is that we're seeing an increase in costs. But likewise, we're seeing Private wealth management net new money of EUR6b.

On PBC we were stable but solid results. And this was underscored by a reduction in brokerage revenues, but an increase in our loan and deposit revenues.

Moving to risk and capital management, our problem loans remain stable, at EUR3.5b, and our coverage ratio did as well. Our provisions, moving onto that, was EUR70m for the quarter. We continue to see releases in recoveries in CIB. But the provisions in PBC have increased, as you can see from the bottom of the page, consistent with the growth in our investments in our loan book.

If we turn to our capital ratio, our Tier 1 ratio, it's at 8.9%. And our risk-weighted assets go up from -- went up from EUR263b to EUR271b. I should comment that we make several comments on our capital management here. As I said earlier, we continue to assume a dividend at 36%. So our Tier 1 ratio -- capital, rather, we reduced by [EUR1.5b], which his approximately EUR2.85 per share of the dividend. So that's already reflected in the Tier 1 ratio that is shown on this page.

The second, we have slowed down our share buyback program, as we indicated in both the Investor Day and in prior discussions with you. We see share buybacks as a lever to help us manage our capital position. We will take on, we will execute the mergers that we have announced in the last months, some in the fourth quarter this year and the first quarter this year -- next year. And we see some reduction in the Tier 1 ratio, closer to the middle of our 8 to 9% range. And, as a result, we have slowed down the share buyback.

In summary, we see the quarter as very solid results, affected by seasonal patterns that are more like the experience in prior years than in 2005. We continue building in our sweet spots, particularly with headcount, but also with infrastructure investments. And the record net income for the third quarter helps with our capital formation process which will support future growth as we discussed at our Investor Day.

That concludes our prepared remarks. And we'd like to now open it up to questions.

Thank you, Tony. And Vicky, we hand the call back into your trusted hands.

[OPERATOR INSTRUCTIONS]. The first question is from Mr. Ivan Vatchkov, Credit Suisse. Please go ahead, sir.

Good morning. I just had three questions please. First one is on the asset management cost base. I was wondering if you could talk a little bit about the sustainability of that cost level that you saw in Q3. I'm just wondering what proportion of that is just compensation benefits to shrinkage. And what proportion of that is a sustainable improvement in the non-comp expense?

Secondly, I was wondering if you could comment on the EUR7b increase in risk-weighted assets in the Corporate Banking and Securities division. What's behind that please?

And lastly, if you could comment on your plans for your investment in Linde. Thanks.

Okay. On asset management cost base, and I think you hit the nail right on the head, there is performance-related compensation in the current quarter. Some of this is related to performance fees earned and related to both bonuses as well as carried interest in our real estate business. There were lower performance fees in this quarter than, for example, in the second. So we saw a decline in those cost categories. So, in the future, if we see the revenues grow through performance fees, you'll see some cost increase on that.

I should also comment that the cost base compared to the third quarter last year, I will remind the group, was affected by the deconsolidations. And this is principally the U.K. business. The hiring in the Private wealth management business, which is part of that segment, has ramped up and we believe has reached a level where we will digest that growth. And so we may not see some increases there.

So, in terms of the cost base, our view is that it will remain -- the inherent cost base will remain fairly stable. But we may see some increases in comp.

With regard to the risk-weighted assets, and I think you talked particularly about CIB, what's driving that is loans in CIB. And some of these are not permanent loans, but loans associated with syndications, so leverage buyouts and the like, where we'll book the exposure and then over the following periods syndicate that out or sell down the position. In addition to that, we've seen some increases in some of the other areas, but not as large as the impact on the loan amount.

With regard to Linde, Linde had a rights offering earlier this -- in the third quarter. We participated in that because we felt their acquisition strategy and their moves were in the interests of increasing shareholder value. We sold most of the shares that we acquired in that rights offering. And our current holding is about the same, percentage-wise, as it was before the rights offering. And we'll monitor that from period to period to determine what our long-term position will be.

Thank you.

Okay, Ivan?

Can I just follow up quickly? Can you give us the deconsolidation impacts from Deutsche Asset Management on the cost base between Q3 now and Q3 of last year?

We'd have to get back to you. I don't have that here. But it's probably somewhere between EUR30 and EUR35m. And the revenue impact was just a little bit higher than that, but maybe around the same amount.

Great. Thank you.

Right, next please.

The next question is from Mr. Jeremy Sigee of Citigroup. Please go ahead, sir.

Good morning. Thank you very much. Can I just ask two questions please? One would be to come back to Asset and Wealth Management. We talked a bit about the cost side and, in passing, touched on revenues. But could you talk some more about the revenues which seem a little bit weak quarter on quarter as well as the year on year? So not just to do a deconsolidation, but the revenues do seem a little light as well. Perhaps you could talk about which areas fell back there.

And then second question, just more general, could you give us an update on Berliner and Norisbank, where you are in the process, the timing, any new developments, any new thoughts on those businesses?

Okay. Asset and Wealth Management, let me just go back to that. First, if you look to the second quarter of this year, we had performance fees in our real estate business, within asset -- real estate asset management business there, and we saw a dramatic -- we saw a falloff of that. And that we see as an inherent part of the revenues and operations of these businesses. But they don't happen with regularity each quarter. So we saw an increase.

And I think we said at the second-quarter call, in answer to a question, that almost all of the increase in the revenues in this segment in the portfolio management area was due to an increase in performance fees. So we saw a reduction there.

The other point I'd comment is that we see a lag time between the hiring of client-facing people in Private wealth management and the time that we see revenues come in. So the first indication that the hiring has been improving results is an increase in the net money inflows. And we anticipate that we should see some increase in -- or at least we expect to see an increase in this business, in that business, from the assets that have been brought in.

As far as Berliner Bank and Noris. Noris will be integrated later this quarter and Berliner Bank in the first quarter of next year. And, except for the fact that our people are working very hard to integrate both acquisitions, there's nothing more to report there.

They're just on track? There's no new news?

No new news, yes.

Okay. Very good. Thank you.

Thank you, Jeremy. Next one, please.

Next question from Mr. Stuart Graham with Merrill Lynch. Please go ahead sir.

Hi. I had two questions please. On the net new money in the asset management business, specifically the Americas business, can you say if that's retail or institutional? And do you think this really marks you turning the corner now, or was this some sort of funny one off which won't be repeated in the net new money in the U.S. business please?

And then the second question is on the customer business in the Equity Trading. So ex-prop, the customer business, I think, went from 843 to 700, if we assume prop was zero for Q3. Do you feel that's just in line with the market, or do you feel that business is underperforming the peers, and has some issues in its own right? Thanks.

On the net new money in Asset Management, it was mainly institutional in the U.S. I would not characterize this as a turning point. I think that there's still some hard work to be done there. I think Kevin understands that, and his management team do. They're confident that they're going to show strong results, both in the U.S. as well as globally. They've got a number of initiatives planned, so they're optimistic but I would not call this a turning point, and -- I'd like to, but the one thing I can say is that we still need to see more there, but they're optimistic.

As far as the customer business in Equities, as indicated, we had very strong returns in emerging markets, and in equity derivatives on a year-on-year basis. Cash equities were down, but we see that as a seasonal effect. As Anshu commented on Investor Day, he has some very clear -- a very clear strategy to fill in the gaps in our platform, particularly in three focused businesses, derivatives, client services and cash, and cash specifically in the U.S.

So we do see some gaps in the business. We see the customer flow results in the third quarter very positively, and Anshu and his team are continuing to execute in their strategy.

Okay, thanks.

Thanks Stuart.

Our next question is from Mr. Matthew Clark, KBW. Please go ahead sir.

Hi, two questions please, firstly on GTB division. Can you just talk about where the revenues declined third quarter versus second quarter, and was it anything to do with the yield curve flattening?

And secondly, in terms of the PWM division, you mentioned you'd made 350 hires. Could you just talk about the number of advisors in that division, and give the absolute number of advisors now versus the start of the year, or a year ago? Thanks very much.

On GTB, the revenues, as I said, were strong in two of our businesses. In the second quarter this year, we had some gains continued close out of some businesses which were not extraordinary, but my recollection is they were probably in the EUR25m range. So if you take that out of the 204, the revenues are approximately equaled -- not that different from where we are, and particularly if you look to the third quarter this year relative to the third quarter last year, you can see growth.

As I said, we had strong returns in the cash management, which is both in payment services and Euro clearing, and in our trust and security services businesses.

With regard to PWM, I don't have the exact number, but my recollection is that it might have been -- the client facing people might be as much as, well, let me not give you a number, but I think it's maybe two thirds or so, but why don't I ask Wolfram and his guys to get back to you, because I'd hate to give you a number that is --

No, that's fine.

No, not accurate.

Maybe we check this and come back to that.

Right. Thanks very much.

Thank you. Next please?

The next question from Mr. Dieter Hein, Fairesearch. Please go ahead sir.

Yes, good morning. I would like to ask two questions regarding your income statement, and firstly, net interest income was up by 53% to EUR1.86b. Could you explain, are there strong increases on the high level in the third quarter and which level do you expect for the next quarters to come? That's net interest income.

And second question, you said that your net income in the third quarter of EUR125m from a settlement of the insurance claims, which item did you book this EUR125m? Thank you.

Okay. On the interest revenues, you're absolutely right. Our interest revenues, compared to the third quarter last year are up. We have a charge in our interim report which combines net interest and trading revenues, because we believe that an absolute trend of looking at the individual lines may not fully describe the story. Our interest revenues come not only from our loan businesses, and as I said earlier, our strategy is to increase our consumer loans, and we have seen a good increase there, in our consumer lending.

But likewise, there is a substantial amount of interest revenue and interest expense, which shows up in our net interest revenues number, relative to our trading book, and depending on whether we're in cash or derivatives in any given quarter, that might have as large an impact on the number as in the straight interest on trading -- on loans.

With regard to [125] Liberty Street, the insurance gain, we showed that number in our other revenues amount, so that's shown in revenues.

And so maybe a follow-up question on this item, your other revenues were EUR120m in the third quarter, so if you booked there a settlement of insurance income on this item, so you had by other revenues a loss. Could you maybe explain where the negative impact came?

The reason these are called other revenues is because there's a miscellaneous number of items in them, so we should expect some impacts of volatility. The principal elements, though, are losses on some hedges that we executed under our hedge accounting program, and losses on the sale of other assets, and I don't know that I can tell you off the top of my head what the losses -- what those other assets were. And those offset some other gains in that line, and so the net effect was EUR120m, as reported.

Okay, thank you very much.

Thank you Dieter.

The next question is from Mr. Carsten Werle, Sal Oppenheim. Please go ahead sir.

Yes, Carsten Werle, Sal Oppenheim, good morning. Three questions please, the first one on your share buyback program. Did I get you right that the pace that we've seen in Q3 is actually what we should expect also for the near future?

The second, could you perhaps give us some indication as far as the prop trading share in debt and equity sales and revenues is concerned?

And the third one, I think you mentioned this, that your origination equity revenues were down in line with the related fee pool. In the release, you also state that actually, you had market share gains in the U.S. and in Asia Pacific, excluding Japan, so it would be correct to assume that you actually lost market share here in Europe, and if so, why?

Okay, on the share buyback program, I don't think I'd read anything into a future trend. We have authority from the shareholders to continue the share buyback in the future.

As we have indicated in the past, and as I said at the Investor Day, share buybacks are not a strategy but rather a capital management technique. We've reduced -- our primary purpose, or primary objective in allocating equity is to profitable growth, both in acquisitions and organic growth, and likewise in increased dividends. And as a fourth dimension, we will use share buybacks. So from period to period, depending on our capital ratios and our initiatives, we will moderate that number.

With regard to prop trading and debt, I'd refer you back to the comments that Anshu made at Investor Day. Our debt prop results are normally in the 10% range, and my recollection is that this quarter was approximately in line -- it's little ups and downs in the quarter, but my recollection is that there was not a remarkable difference this quarter.

With regard to equity origination, I think our market share in the third quarter last year was up from the prior trend. This quarter showed a good return, a good market share. But this is a business, as you can appreciate, that's characterized by lumpiness, so we're going to see movements up and down. What we would prefer to look at, what we do look at, is trends and not quarter-to-quarter fluctuations which may be due to single transactions.

Okay, many thanks.

You're welcome.

The next question is from Miss Fiona [Forfield], Execution. Please go ahead Madam.

Hi, I have on the non-compensation operating cost base where the growth is slowing to 5% at the nine month stage and was 0% on the third quarter on the third quarter. Do you think this growth rate is unsustainable at this low level, given the organic growth? Or do you think there's a risk that we could have a Q4 rise, as we have done now and again in terms of catch-up. And could you give us a bit more of a feel for what your plans are on this line going forward?

Thank you. You're right, we did have an increase in the fourth quarter last year. We are very focused on this category of expenses. We have been talking to our business folks as well as our infrastructure folks in this quarter, and looking at their plans. I can only tell you that we have spoken to them about keeping this down.

I think over time, as we grow the businesses, you're going to see some increases in that category after the mergers, but also as we fill in the strategic gaps, we're likely to see some increases. But that should be followed by increases in revenues. One of the reasons we look, both internally as well as in our disclosures at the non-comp ratio is that if we expect to see growth in our businesses, with that goes technology spend. We're also very focused on compliance and control issues, so there are costs there, so we would see some increase. Unless we invest in our businesses, we can't expect them to grow.

Thanks very much.

Okay, thanks Fiona.

The next question is from Mr. David Williams, Morgan Stanley. Please go ahead sir.

Thank you. Good morning. I'd just like to explore a little bit further the issue of seasonality, and two aspects of seasonality please. First of all, I see the July/August period was weaker, and you commented on that. Certainly UBS made similar comments yesterday. From your experience, would you say it was a normal level of weakness or was it exceptionally weak, even by the historic standards? And I recognize that 2005 is not the basis that we should go from. So if you could give us a sense of that weakness in July/August, and really how important the month of September was to making the result?

And the second question really relates to the seasonality we should then expect in Q4. As you say, referring back to previous periods prior to 2005, obviously the Q4 revenues tended to be stronger than the Q3, and I'm guessing from your guidance and the suggestion that the momentum has continued into October, that's something that we should be expecting.

But really, I guess, following on also from Fiona's question, the costs also tended to be higher, and so at the profit line from a seasonality perspective, historically, even prior to 2005, the seasonality, we didn't see an improvement in profits coming through in Q4. I just wonder if you can help us with a bit of guidance on that please?

Yes, July and August were weak. The quarter was helped, as most third quarters are, by September when people return to work. The sense we've gotten talking to our folks is that the July and August [effects] was probably more dramatic than in prior years because people were cautious, following the volatility in May and June, which I mentioned earlier. But that's probably as much anecdotal as otherwise in terms of the customer flow businesses.

Certainly we saw some effects we attribute to the reduction in the PCM business, probably to people waiting before proceeding with issuances. September was a strong month, and I think that was probably the case across the market. That continued into October, although it's early in the quarter, and we're watching and looking to see how the quarter develops.

Thanks, and Q4?

In Q4? We'll wait to see how that quarter, that quarter develops.

Okay, thank you.

But David, we'll leave it there. Next please?

The next question is from Miss Joanna Nader, Lehman Brothers. Please go ahead, Madam.

Hi, good morning. I think you answered my question a little bit in response to Fiona's earlier question. But I was wondering a little if you could comment a little bit more on the cost/income evolution or your flexibility, particularly with respect to the investment bank, and your plans to build out in U.S. equities as you mentioned, and also in electronic trading in prime brokerage, like Anshu mentioned at the Investor Day. Just tell us what -- how do you see this impacting your cost/income flexibility over the next several quarters?

It's a difficult question to ask. We know the investments we have to make. We think that those are important for our strategic growth. It's always difficult to forecast what's going to happen to trading revenues particularly in a sales and trading operation, so in terms of moderating the costs, once you start down a track, you probably find it difficult to immediately stop, and again, what I'd point to is the long-term trends.

Anshu mentioned this, and I think Michael Cohrs likewise, in both corporate finance and GTB, that we have some initiatives as part of their strategic plan. They, as management, have confidence in those initiatives, and we will make the investments necessary and it would be short-sighted, unless something very dramatic happened in the market, to curtail development programs in Singapore. So I think we look at it on a strategic basis. We look at where the business wants to go, how it's getting there, and we have to make sure that we invest the money necessary both in people and in other resources to achieve those objectives.

Okay, and would you say that in terms of where you are with respect to where you want to be in progression towards these investment goals, are you beginning now, and so some of it has been the number as a menu so it would build up slowly, or where are you in that process?

I think it depends on the business. If you look at private wealth management, as I indicated, we have been through a period of significant hiring. These were important hires for us, as we indicated. Most of them were client facing, and we are looking now to Pierre and his folks to show first, invested asset growth, which they have, and then subsequently, the revenues.

We just announced in private wealth management the acquisition of Tilney here in -- not here, but in the U.K., and so that's a step in that strategic plan. In other businesses, some of the initiatives are at early stages, and some of them are probably along. So it would depend -- there's not a single answer to say we're at the middle, we're at the end. It depends on the business.

Okay, great, thank you.

Thanks Joanna. And can I make a suggestion? I'd like to signal that we have several more callers. Can we work on the assumption of a single short question and short answer to try to take as much as possible? Thank you.

The next question is from Mr. Michael Rohr, MainFirst Bank. Please go ahead sir.

Yes, good morning. Two very short questions if I may, number one, Advisory revenues in Q3. Should we expect this level to be expanded in Q4?

And second question on the staff allocation in Corporate Banking and Securities, would you expect that the addition in staff already tackled most of the gaps, especially cash [U.S.] and derivatives, or is there any other special niche which you filled with the staff addition? Thank you.

It is your job, and now let me see if I can do my job in looking at that. As far as Advisory, our pipeline is strong, as I said, but these are things that could happen one quarter or another quarter. We're looking at our position in the market. We're confident there.

On CB&S. I don't think we're at the end of our hiring, as you can see from the chart included in the Analyst Pack. We did significant new hires, but we will continue to work to fill in the gaps.

All right.

Thank you Michael. Next one please.

The next question is from Mr. Dirk Becker, Kepler Equities. Please go ahead sir.

Good morning. I have a question on Asset Management please. As far as I am aware, the operations that you've sold last year were loss-making, between EUR20m and EUR30m per quarter. Maybe you can confirm this? And against this background, I would have expected the deconsolidation of these units to help the profit much more and now profits are going down, so isn't it fair to say that Asset and Wealth Management performance is really disappointing this year?

I understand your question. The costs that we've eliminated were the direct costs involved in the business. There could have been -- there are some other costs. For example, we had some vacant space. We had some space that we eliminated. We took a loss in one of the quarters last year. I forget which one, and that would not be in the numbers that we see throughout this quarter and on a fully allocated basis there were some. So the number we gave you is the direct cost saving, and some of the other costs were absorbed by other businesses, and some were eliminated through, as I said, space.

So what you're saying is that you were not able to really deconsolidate the full losses from the U.K. Asset Management, and you kept some of the non-specific costs, or?

I don't think that's what I said. I think what I said is that we have deconsolidated the revenues, because those are gone. We deconsolidated the direct costs, and then the remaining costs were either eliminated or with allocations internally, that went to other parts of the organization. Which means that in some regard, if we had some growth that we had to make, either in the controlled compliance function, in their internal management structure, that we avoided doing that because we had resources that were otherwise deployed. I don't have the exact number, so I hesitate to tell you how brief that is. But that's the effect.

Okay, thank you.

Thanks Dirk.

The next question is from Mr. Georg Kanders, WestLB. Please go ahead sir.

Sorry, it's just one number crunching question.

Yes, in a way, we're used to that.

Yes, okay. This is in the payment account line, in the revenue lines in private and business clients. Normally you have a pickup in Q3, and this year it is rather small. Is this now a permanent situation or is it something exceptional only for this year?

I don't know the answer to that.

Georg, can we come back to that?

Yes.

We just have to look it up.

But this was really reliable all over the last four years that we have --

Well, although, what I could mention to you, if you look at page 13 --

Of the data supplement.

Data supplement, we had in payment and account services in PBC, we said --

Yes.

Our revenues were EUR216m in the third quarter last year, EUR215m in the second quarter this year, and EUR217m. So that looks pretty predictable, or pretty constant.

Oh, no, no, there was normally from Q2 to Q3 a pickup by between EUR10m and EUR20m.

Yes, I don't know that I read any significance into that as a trend, but --

Yes, okay.

But Georg, we're happy to check with the business and come back to you.

Okay.

Yes? Thank you.

Thank you.

The next question is from Mr. Kian Abouhossein, JP Morgan. Please go ahead sir.

Yes, I have a quick question on non-observable derivative instrument accounting, here [TFO23] it is changing. First of all, will you adapt the changes early in '07 or '08, or will you not change your reserve accounting at all?

Yes, as you know, we will not adapt early, but you should also recognize that beginning in the first quarter in 2007, we'll be reporting under IFRS, and rules there are somewhat different.

But you will split them out, as I understand it, and IFRS you will have to give -- make a note of your changes in reserve accounting. Is that correct?

You know, Kian, I don't remember exactly what the requirement is, but I can assure you that we will follow whatever the rules are.

Great, thank you.

Next please.

The next question is from Mr. Joachim Muller, Cheuvreux. Please go ahead sir.

Yes, good morning, two quick ones on risk provisions. I know it's not very material on the retail side, but could you maybe give us an indication of your expectation on the trend there, whether you expect that to continue to increase?

And then secondly on the CB&S division, you mentioned at the Investor Day that hedging is currently very cheap, and so you are taking the opportunity of that. Could you give us some feel for the sensitivity of widening credit spreads to your CBS result, and how that's [inaudible] your risk provision outlook for that segment? That would help. Thanks.

Okay. As far as the retail business, if you go to page 24 of the presentation, you will see that a number of moves up and down. Our view is, and I don't want to forecast or make forward looking statements with regard to this, but we see this growth consistent with the size of our consumer finance book. We have an objective, or strategy, of increasing that business, because it's a very good business that we'd like to do more of. And so the results may show a trend that continues increasing.

With regard to CB&S, and I can cite the numbers for you, with spreads narrowing and this quarter we had mark-to-market losses of EUR65m. We've been in a loss position in the third quarter last year, when we had EUR75m of mark-to-market losses, and in the second quarter this year of EUR53m. We would expect -- and of course this goes the way -- the opposite way from loan loss provisions. And I should comment, these are losses on the names we hedge, so there may be some other movements in the market generally.

We would expect that over time, if the credit environment becomes less benign, that this will have a benefit, which is why we're in the business -- of why we've not the business, but why we do the hedging.

Okay, thanks.

Jonty, thanks.

Gentlemen, there are no more questions registered.

Okay. Well, are we at the end?

I think. Well, I want to thank everyone for participating. I know it's earlier -- we're in Berlin. It's earlier than it is here in London, for example, so we appreciate you getting up early and reading our release, and preparing your questions, and I want to thank you very much for your attention.

Yes. Thanks from me as well, and goodbye.

Ladies and gentlemen, the conference call is now over, and you may disconnect your telephones. Thank you much for joining. Goodbye.