Deutsche Bank AG (DB) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

This is the Chorus call operator.

Welcome to the Deutsche Bank analysts' meeting.

As a reminder, all participants are in listen-only mode, and the conference is being recorded.

After the presentation, there will be a Q&A session.

(OPERATOR INSTRUCTIONS).

We will join you now into the analysts' meeting with Dr.

Wolfgang Schmidt, Head of Investor Relations.

Thank you.

Yes, thank you, [Daniel], and good morning from a sunny Frankfurt.

This is Deutsche Bank's second quarter call.

As good practice, we will start with a presentation performed by the CFO of Deutsche Bank, Tony di lorio, who is with me this morning.

By now, you all should have copies by hand of our earnings release for the second quarter, the full interim report, the financial data supplement, and the set of slides, which Tony will refer to.

For good order, I have to inform you that the cautionary statements which you will find at the end of the slides, and also at the end of the interim report, are an integral part of this presentation.

In the interests of time, I will urge you to read them yourself and I will not read them out to you.

With that, Tony, I hand over to you.

Thank you, Wolfgang, and good morning, ladies and gentlemen.

Second quarter was a successful quarter for Deutsche Bank, despite market conditions that remain very challenging.

There are concerns that persist even today related to the sub-prime market in the United States.

Investors are taking a more cautious approach with respect to leveraged finance and other activities, and we'll talk about both of these issues later in the presentation.

Against this backdrop, the second quarter results were very strong.

Record revenues in investment banking, strong results in GTB and PCAM.

And during the quarter, we have received approval from our AGM to launch a new share buyback program, and we purchased during the quarter 5.8 million shares under all authorized buyback programs.

On a year-to-date basis, we show strong results as well; revenues earnings, diluted EPS, and pretax RoE.

And we had net new money for six months of EUR27 billion, and about EUR14 billion in the second quarter.

Turning to page four, you can see the results on our RoE and diluted EPS, both of which developed strongly.

EPS in the third quarter was EUR3.60, and for the six months, it's EUR7.86, up 41%, while our RoEs were 36% in the second quarter and 40% on year-to-date.

These results in RoE were generated despite a substantial growth in our average active equity.

Average active equity was up EUR5.3 billion to EUR29.8 billion at the end of the second quarter, from EUR24.4 billion a year ago.

That's a EUR5.3 billion increase.

Most of that increase is from net income net of dividends, and as I said, despite that substantial increase, we still show an improvement in our RoEs.

On page six, we have shown our RoEs excluding certain significant gains on principally industrial holding sales.

And as you can see, even excluding those gains, our RoEs are up, with 37% for the six months last year versus 38% for the six months this year.

Turning to page eight on the Group results.

Revenues -- income before taxes rather, was up 32% to EUR2.7 billion.

These results included a gain of about EUR130 million on the sale and leaseback of our office building at 60 Wall Street.

And we're also pleased to report, as we'll go into the details shortly, that all businesses developed to this favorable result in the second quarter.

Net income was EUR1.8 billion, an increase of 31% from the second quarter last year, and this increase is lower than the pretax number because our tax rate went up slightly.

Our effective tax rate for the second quarter was 34.2%, which is in line with our mid-term guidance of 33% to 35%, but this compares to a lower rate, 33.6% for the second quarter of last year, and it is also higher than the first quarter, which was at 32.6%.

As we look forward to the year, we see this rate averaging in that guidance number that I've just cited.

Net revenues, on page ten, increased 27% to EUR8.8 billion.

Included in this number is the gain that I just mentioned on the sale and leaseback of our 60 Wall Street building.

In addition to that, the second quarter is the traditional dividend quarter in Europe, and we received and recorded, which we do on a cash basis as required, dividends in the quarter of EUR130 million, which is up from EUR112 million in the prior year.

We continue on the non-interest expenses on page 11.

These for the quarter were EUR6 billion, which is an increase of 25%.

And let me break that down between compensation and non-comp.

On the comp side, compared to the second quarter last year, we had increased bonus accruals consistent with the stronger results; and also, increased compensation from headcount growth resulting from both acquisitions as well as organic growth.

In addition to that, we had higher amortization of equity compensation in this quarter than we did in the second quarter last year.

However, that number was lower than the first.

During the first quarter call we talked about the acceleration of the REUs amortization for early retirement, and we talked about a range of numbers.

Most of that is reflected in the compensation in the second quarter.

However, it's partly offset by amortization for individuals who reached the threshold for early retirement during the second quarter, and we'll have some of that each quarter going forward, plus incremental amortization.

We had one more month of amortization on the grants given in February, and all of that was somewhat offset by social security, national insurance, tax, on those accruals.

With regard to the non-comp, increase over the second quarter last year was EUR360 million.

However, this number includes higher litigation provisions and a charge related to the purchase of our German -- our Frankfurt headquarters which both of those resulted in an increase and they're recorded in that non-comp.

In addition, we increased technology spend and costs of marketing and travel which are driven by higher business activity.

If we were to take our non-comp costs for the quarter and reflect the impact of the acquisitions, the costs of our newly merged entities were lower non-comp in the second quarter than they were in the first, and we also were to adjust our non-comp for the litigation costs and the building costs that I just referred to, on a comparative basis from the first quarter, our costs are up approximately 3%, in the non-comp.

Turning to page 12 and our efficiency ratios, our cost income ratio for the quarter was 68%.

Our comp ratio at 44% remained within the range that we set for comp in terms of monitoring comp levels.

In our non-comp expenses the ratio was up and that's from the first quarter, but lower than the second quarter last year.

And that's resulting from both the changes in revenue for the first quarter as well as the impacts of those two costs that I referred to just a minute ago, litigation and building purchase.

If you turn to page 14, you'll see a profile of what our businesses did.

And you can see that we had improvements in all segments, CB&S being the largest percentage growth.

But the other three segments all were up within the 18% to 24% range.

And if you look at the effects in AWM, GTB and PBC, we've shown a 20% increase in the combined contribution from those three businesses over the second quarter last year.

And so for the third quarter they contributed in total EUR835 million, for the first half EUR1.530 billion which is up over the EUR1.410 billion in the first half of last year.

CB&S had a record second quarter results.

Income before taxes was up 30% to EUR1.752 billion.

And this was characterized by a broad base performance across sales and trading, debt and equity, higher revenues in origination and advisory as well.

We turn next to sales and trading debt.

You can see the impact on there, 18% increase.

The businesses contributing to that were credit, with a strong contribution from our infrastructure business and favorable market positioning in a volatile quarter.

Emerging market debt showed a positive development as did commodities, particularly on a year-to-date -- year-to-year basis.

In rates, money markets and FX we had -- impact there was reduced RMBS activity, which we'll talk about shortly.

And although we had increased volumes in client flow businesses, these were offset by declining margin pressures.

The contribution to debt from the designated prop was in line with our published over the cycle targets.

If we now turn to a question that has come up.

Market participants in the media have talked a lot about issues having to do with mark to model.

Some of you have raised the questions directly with us.

And what I'd like to do is just to describe before we go on what our policies and procedures are with regard to mark to markets that we use models to determine.

Our trading -- the fair values in our trading portfolios are reviewed and verified by several independent control functions.

It's a multi-level process including finance as well as market risk management, both of which are independent of the businesses and report to either Hugo Banziger in the case of market risk or to me in the terms of finance.

Where we use models, the models are validated by market risk management before they're put into operation and all the pricing inputs are verified by the independent finance function.

The policies regarding this process are independently determined and we have applied them consistently.

The model -- many of the models are industry standard and they use highly liquid market inputs.

We do use in some cases bespoke models for complex structured products.

However the policies here are subject to the same rigorous independent checks and do attract particular review and focus, both with the control functions as well as with senior management in the trading businesses.

We recognize -- we follow recognized market practice and reporting standards, so in terms of unobservable marks of practice on derivatives is to defer that income.

And we also -- our validation and verification processes are assessed regularly by both the regulators as well as our auditors.

Another question that's come up on a number of occasions in the press, but also to us, has been the impacts or practices with regard to CDOs and CLOs.

And before we go on to equities I'd like to comment -- make some comments on this.

First, we are a market maker in CDOs, which is distinct from an end hold investor.

Virtually all of our CDO activity is in our trading books and it's mark to market daily and subject to the process that I just described.

Any positions not in the trading book are subjected to the same process of mark to market on a daily basis.

And the results are reflected if not income in other parts of our financial statements.

The daily risk monitoring discipline is followed very rigorously and members of the Board and others in senior positions in the trading businesses would know of major movements by the next morning.

We all get reports, if not the same evening that any movements occurred.

Predominance of our holdings in the book are AAA paper and any sub-prime exposure we have is currently relatively flat.

Positions change constantly because we provide liquidity and we trade in both directions, long and short, to meet client needs.

Performance; as part of the performance in the second quarter our CDO results are part of sales and trading debt which I just reviewed with you.

So you can see the results or you can see what the impacts would have been in that quarter.

With regard to the July performance to date, and although I hasten to add that you should not extrapolate anything from July results because it is only one month of a quarter, I can report that we're happy with the development from our business in sales and trading in July, which includes the CDO activity.

Let's move on to sales and trading equity, which was strong across the board, an 89% increase over the second quarter results last year.

And if you look at the right-hand side of the page, you'll see that we had strong contributions from equity derivatives, with robust activity in Europe and gains in both institutional and retail.

Our prime services business has turned in strong results.

Cash equities also was positive.

And if you remember in the second quarter last year we reported a loss in designated equity prop trading; the current quarter showed a gain which was -- resulted in a strong rebound.

So part of the increase of 89% is the result from positive as opposed to last year's result in equity prop.

We turn to Origination and Advisory; we had a record quarter.

Increase in revenues of 23%, EUR895 million.

And we had strong contributions from the advisory business, our pipeline in the second quarter of '07 is up strongly over the second quarter last year, but also over the first quarter this year.

Equity origination showed improvement as did the investment grade.

On the high yield and leveraged finance business, there what we're seeing in the market is increased caution from the investor.

And I'd like to take an opportunity just to talk about the impact to that business and how we manage it and how we view it at Deutsche Bank; this is the leveraged finance business.

And I'd like to do that in three dimensions.

The first is credit, the second is our commitments, and the third is the size of the business in the context of Deutsche Bank.

First, with regard to credit, before we issue a commitment we go through a very thorough credit review similar or the same as we would if we were making the loan to the borrower, and the borrower would normally be the target of the acquisition in leveraged finance, as if we were going to be the holder of the loan.

As a result, we're comfortable with the credit quality of the names on which we've extended these commitments, and we do not see the current volatility or issues in the leveraged finance business at the current time as a credit risk.

With regard to commitments, working with Hugo Banziger and his colleagues and my colleagues in finance as well as with the business, we go through and review all open commitments and their status at points during the period.

I can report that we're comfortable with the positions and the carrying values of those commitments.

As a result of this detailed review, we took a charge in the second quarter, which is reflected in the leveraged finance numbers and in the origination debt numbers in this segment, but we took those charges because we've marked the commitments to market, and where the value is below our carrying value for the commitment, and these commitments are off balance sheet, but there are carrying values that have to be reflected on the balances sheet.

And, as I said, this writedown of these commitments is reflected in the quarter.

In the second quarter, our business has become more selective and has turned away some new opportunities.

On the equity bridge side, we've reduced our outstanding commitments and we're looking at bringing those down even further in the next period.

Regarding the magnitude of the leveraged finance business on Deutsche Bank, in the last six quarters, the revenues from high yield and leveraged lending origination, was less than 4% of Group revenues.

And we don't report that breakdown, but we do show debt origination and it's part of that number so you can relate to that to the statistics in terms of the overall revenues.

And let me just emphasize again; it's in the reported debt origination number where these writedowns of the commitments are reported.

The investor appetite for this business, in terms of buying the paper from us, is down significantly from the first and second quarter and we anticipate continued fluctuations and lower volumes in this business in the quarters ahead.

We expect this to result in lower revenues in leveraged finance going forward, but that is from this low base of 4% of Group revenues that I alluded to earlier.

Long term, we remain committed to the leveraged finance business and we will engage in transactions that are well structured and well priced.

Let's turn to GTB.

The performance here is a strong increase, EUR247 million, up 24% from the second quarter last year.

Contributions came from strong growth from the two primary businesses in this segment which are cash management and also the trust and transaction -- trust and security services business.

We exercise continued discipline on cost as well.

We announced during the quarter a small acquisition in our domestic custody business in Turkey consistent with our aim of expanding in that area.

Asset Wealth Management, if we turn to page 20, had a strong year-on-year result as well as quarter-on-quarter.

The pretax for this segment in the second quarter was up 21% to EUR292 million for the quarter, and this was driven by strong results in both Asset Management as well as our Private Wealth Management business.

The quarter includes increased real estate performance fees, which are reported in our revenues in the portfolio in fund management line, which is up from the first quarter, but it remained below where we were in the second quarter last year which had very substantial performance fees.

If you remember last year in the second quarter and in the fourth quarter, we had strong performance from these fees and, as we've said on those occasions, these don't come in on a regular basis.

We only account for these performance fees in the Real Estate business once the assets are sold.

So we don't accrue them on unrealized gains, but only on the gains when they're realized.

The quarter also included a gain in Asset Management of EUR48 million from the sale of our business in -- or part of our business, Asset Management business, in Australia.

However, in the second quarter of '06, we had a gain that was almost equal to that of EUR35 million from the sale of our Institutional business to Aberdeen Management and that was for the elements -- part of the elements in the UK and some of the elements in Philadelphia.

So the two gains roughly offset with a 13 or so gain effect, a positive effect, on the development from the second quarter last year.

On a net new money basis, we showed strong net new money, EUR11 million in this segment, EUR6 billion -- EUR11 billion -- excuse me, EUR6 billion from Asset Management and EUR5 billion from PWM, and this is net of an outflow of EUR10 billion or reflecting the sale of our Australia business and of a business in Italy.

The business in Italy has not closed yet, however, because we have classified that asset as held for sale, we have shown the assets as [reducing].

Turning to page 21, PBC, another strong quarter with pretax of EUR297 million, up from EUR252 million, that's 18%, and this reflects our platform expansion in norisbank and Berliner Bank, as well as investment in Poland and Asia.

Net new money was EUR3 billion and provisions are up.

If you were to look at provisions, and we'll go into these later, in PBC they're up EUR30 million from the second quarter last year.

Two thirds of this come from norisbank and Berliner Bank, which were integrated after the second quarter last year, and then all other businesses, the provision is up 10% -- EUR10 million, and that's consistent with our goal of increasing our consumer finance lending and mortgage lending in this segment.

Turning to page 23, you can see that problem loans remain at a low level, EUR2.9 billion.

The impaired loans under IFRS also are down to EUR2.5 billion, and the impaired loans are covered 66% by reserves before the collateral is taken into account.

I just alluded to provisions a while ago and these are, for the quarter, EUR81 million, about the same as they were in the second quarter last year, but if you look at the notations at the bottom of page 24, you can see that this is comprised of continuing releases of provisions and CIB; almost double -- more than double where they were in the second quarter last year.

And I should add that we're in a benign credit environment.

At some point this will probably turn, but for the current period we have releases in this quarter.

As far as PBC is concerned we're up from EUR94 million to EUR124 million, that's EUR30 million I alluded to just a short while ago and as I said, EUR20 million of that is from the acquisitions and EUR10 million is from the remaining business.

Our Tier 1 ratio for the quarter was 8.4% and that remains within our range of 8% to 9%.

We saw a growth in risk weighted assets to EUR308 million and that came from our Derivatives business, our Loans business.

But that does not reflect any leveraged finance, so we didn't increase it because we had leveraged finance loans on our books, as well as undrawn commitments.

To conclude, the second quarter was a very strong quarter for Deutsche Bank in very difficult market conditions as were the half year results.

That concludes my prepared remarks and we'll be happy to take questions at this time.

We'll return to the moderator.

(OPERATOR INSTRUCTIONS) The first question is from Mr.

Kian Abouhossein of JP Morgan.

Please go ahead, sir.

Yes, hi.

A few questions, first of all on leveraged finance.

If I look at your numbers and I look at the cost income ratios that are normal for leveraged finance I can calculate it would be roughly 5% of your revenues.

And if I add on top the cross sale that you make on financial sponsor business, which for the industry is about 55% on average it would be about 6% of the overall Group profits.

Just wondering if you could make any general comments and if there's any concern that this wallet of profit is expected to disappear as we understand no new business is coming through?

Secondly, on your positioning in fixed income you're clearly making some money, and you made some money in the first quarter.

Is this something that we should continue to expect so far into the third quarter to impact your results?

And if possible, if you could give us any quantification at all or any indication of the amount that you made there?

And the third point is, can you talk a bit about counterparty risk in fixed income hedge funds for Deutsche?

And secondly if you could take also a little bit about warehousing risk, in particular within the CLO business?

Thank you.

We've got to turn the speaker on.

I don't know that the leveraged finance business will disappear.

It certainly will slow down, but I don't know that at this stage any of us can indicate it would disappear.

There may be some other activities that take its place, if not with sponsors, perhaps with corporates, but I don't want to speculate at this point.

But I don't know, I think we'd still watch what's happening in that field.

With regard to the P&L I don't have what the cost income ratios are on that business, so I don't know that I can address at this point with any certainty what the impact on the bottom line would be.

But I would reiterate that if you were to look at the impact on our revenues in the last six quarters, it has been at the levels that I alluded to which was about 4% in that period.

With regard to fixed income we live by looking at the markets very carefully, by applying prudent risk management policies.

And the markets move up and down, of course, and we look to adjust our position and our views on a regular basis.

So can we continue to expect the levels that we have shown in the second quarter?

It's a business that I would not attempt to forecast what the results would be.

I would just add that we will continue to monitor, and our people do on a regular basis, both on the trading desk as well as in the risk management.

As far as the quantification I would just leave it that in one month I'd caution you, do not extrapolate the quarter from a month, but our results in CIB, which include sales and trading as well as the corporate finance business covering leveraged finance and other activities, I can only report that given July's results, and I'm only speaking July and I'm not trying to be cautious about the future.

It's just we would not forecast what a quarter's results would be, particularly in these times, but we're pleased with those results.

With regard to counterparty risk in fixed income, and you mentioned, Kian, hedge funds particularly, we have a policy that we do not lend anything unsecured to hedge funds, so our exposures with regard to hedge funds are fully collateralized.

Our practices follow fairly strict policies with respect to haircuts and the type of collateral that we'll take, including concentration.

We mark to market our exposure on a daily basis and we call collateral on a daily basis.

So we're comfortable with the values because we do look at them on a regular -- on a daily basis.

I would conclude that though, by saying that hedge funds continue to be a very important priority client segment to us, so we would look forward to doing more business or continuing to do business, not more business, whether more or less I don't know, in the hedge fund arena.

Okay.

Let me quickly add we have a policy not to cut off any participant, therefore I would really ask everybody to limit the numbers of questions going forward.

Thank you, Kian.

Thank you.

The next question is from Mr.

Ivan Vatchkov of Credit Suisse.

Please go ahead, sir.

Good morning.

I have three questions, please.

Firstly I guess unsurprising coming back to LBOs.

You mentioned that you're comfortable with commitments, could you just give us some data?

I think at the investor day you mentioned that your leveraged finance book was about EUR3 billion and hadn't grown between '03 and end of '06, if you could tell us what that is now in terms of funds that you've already provided?

And also if you could talk about your commitments, ideally if you could give the size, but also I think a lot of your US peers give the year-on-year progression in terms of non-investment grade commitments.

That would be very helpful.

Secondly, cost and revenue growth for the Investment Bank; I think cost growth is running ahead of the revenue growth.

Could just talk about sort of what your view is and what scope you see for stopping some of your investments, as you say in this uncertain revenue environment?.

And the last question I had was just on prime services, something you alluded to earlier.

What is the typical delay that you get in terms of receiving information from your hedge fund counterparties?

Would you typically get some kind of a monthly mark to market, or do you have to wait until the end of the quarter marks have come in and then take a view on collateral?

I'm just trying to see whether some of the problems that may or may not have occurred in July, when you will actually receive the information from your hedge fund counterparties.

Thanks.

First, on the size of the LBO book, I don't know that any others would talk about the size of their commitments and I don't -- we won't either.

I will reiterate, though.

We have gone through, and we go through and will go through on a continuing basis with credit risk colleagues as well as the business, to look at the value of those commitments and we will continue the practice of recording markdowns when we think that's appropriate.

So when I said before we're comfortable with the levels, we're comfortable that they're reflected in our financials as at June 30.

And I can tell you that we did take forward the analysis until last week just to see that any of the assumptions that we made as of June 30 were still current, and so we're -- and as I say, we will continue to do that.

As far as the cost and revenue growth in CIB, that is driven principally at the period -- if you look at the rate of revenue growth and you look at the rate of non-interest expense growth I think you're observation is correct; the expenses are growing at a faster rate.

But that can be attributed, and it's to compensation, and it could be attributed to three primary reasons.

First, compared to last year, our retention costs, amortization of our equity grants, are higher than they were, and part of this is due to the early retirement policy, and the acceleration, and part of it is due to a change in our vesting, so we're accelerating in both cases.

We're vesting on a tranche basis rather than on a end of period basis so we're, if anything, we're recording expenses faster.

We had, last year, a loss in our equity proprietary trading group, and there's performance compensation related there, and it was again this year, so part of that is due to that event, and then we had higher severance this year than we had last.

If you strip those items out the expense growth and the revenue growth are substantially the same.

With regard to the prime services, we don't depend on marks from the counterparts on the hedge funds.

We look at the valuations of the collateral we're holding against leverage on a daily basis ourselves and we call collateral on a daily basis if it's determined that the -- that we need more collateral to cover it because the collateral values have changed.

Sorry, can I just follow-up very quickly?

I'm conscious of time.

On leveraged finance, would you be able to tell us at least what are the size of the marks that you took in Q2 [also]?

I'm fully aware that you're saying that you're very comfortable with that.

And if I just look at your cost growth, are you suggesting there are some items which are accounting related, i.e.

that there's some inertia in the cost base which may limit your ability to cut it back in the short-term if there is revenue volatility?

I'm talking about amortization of expenses and changing of vesting.

In terms of the size of the markdowns, I don't know that we're prepared to tell you that, but it was -- the number was material.

I don't know how you judge that or we would judge that, so maybe I shouldn't say they're material.

The number was not insignificant.

As far as the -- and we think realistic and we think proper.

As far as the accounting effects, the amortization of our REUs under our new policy, maybe that's an accounting effect, those are costs that would ultimately be borne so we're just changing the timing of the recognition.

With regard to the other two items, I don't know what's going to happen on performance comp with regard to equity designated prop trading or with severance.

So I can tell you we monitor expense growth very carefully, we analyze the drivers, and so I'll just leave it at that.

Thank you.

Thanks, Ivan.

And again, I would like to caution everybody, in the interests of time, I'm informed about a long list of participants who want to ask questions.

Let's play on the understanding short question and short answers.

Okay?

Next please.

The next question is from Mr.

Michael Rohr of MainFirst Bank.

Please go ahead, sir.

Mr.

Rohr, are you there?

I'm there.

Hello?

Hello?

Can you hear me now?

Yes.

Okay.

Perfect.

Hi there.

Just a final try from my side on the LBO.

Actually, you told us that you took a Q2 charge in terms of the open commitments and the carrying value on the balance sheet that you have there, can you possibly indicate how big this charge was and possibly, in terms of basis points, how much that has been?

And maybe just two other questions.

First of all, on the norisbank launch, we are still expecting the launch of the new bank as of summer this year.

If you can update us there on the timing and on the impact you expect it to have on the second half revenue base at Deutsche Bank PBC?

And the final one on Abbey Life, the acquisition there, how you see this adding to profits going forward in this venture?

What was the third question?

Abbey Life.

Yes.

The third question on Abbey Life, if you can just elaborate a bit on this acquisition there and how much this might add to profits going forward?

Thank you.

As far as the LBO marks, I think we dealt with that in the last question.

Yes.

I just wanted to try again.

We're not going to quantify it, but we appreciate the question.

As far as norisbank, we're going to have a marketing effort in the third quarter and there'll be some additional marketing costs, for those that are focused on the cost side.

I don't have revenue projections; I don't think that they would happen in the same quarter because they probably would lag a little bit.

As far as Abbey Life is concerned, that acquisition was part of our insurance and pensions group in our global markets rates business.

We see it positively contributing probably in the first year of the acquisition.

We're not talking about triple-digit contributions, but the idea here is to utilize the skills that we have developed and have in advising clients to deal with closed book.

We're not going into and you shouldn't interpret anything there that we're going into the life insurance business.

These are -- this is a closed book, we will not be issuing new policies and we see it as part of our -- it'll be reported in our trading results in depth.

Alright.

Thank you.

Thank you.

Okay.

Next please.

The next question is from Mr.

Jeremy Sigee of Citigroup.

Please go ahead, sir.

Thank you very much.

I just wanted to come back on a couple of points in corporate banking and securities.

Firstly, on the cost increase, I sort of understand in absolute terms why it's going up and you've talked about performance related compensation, I guess I'm still surprised that the cost income ratio is going up, particularly against such a strong revenue increase.

So I just wondered if you could comment about how you manage that in terms of the ratio versus the absolute and why the ratio is going up?

Secondly, you commented on the risk weighted asset increase in that unit and you talked about derivatives, could you talk a bit more about that?

It just seems like a very big jump and I just wondered what is behind that in terms of business initiatives.

And then a final question, just very briefly, transaction banking revenue's very strong, are those sustainable?

(inaudible)

Okay.

As far as the cost increase in CRB and the cost income ratio, the reason I cited those three items before is because those are increasing.

The effect of those is to have an increase greater than the rate of revenue increase.

Our bonus accruals in that business, the formula we use, the approach we use, has not changed, so what's driving up the cost income ratio is the fact that those items that I mentioned are contributing to a growth in expenses that was faster than the growth in revenues.

With regard to the RWA; we conduct a derivatives business.

Because of the way the rules for calculating RWAs for derivatives work, we would see sometimes a more pronounced increase in the RWA than there is in the business because of certain add-ons.

And, if you're interested, we can get somebody to describe how all that works for you.

Is it to do with the increase in volatility?

Does that, basically, have a mathematical effect on RWAs?

It's in volume.

Right.

So it is just volumes simply.

In volumes.

Okay.

Thank you.

Sorry, and transaction banking?

Oh, I'm sorry.

Transaction banking, well, we look at that income, it comes from several sources.

First is net interest.

So as we hold balances in our cash management business and, in fact, in some cases in the trust and security services business, depending on the direction of those balances most of them continue, although there is some movement.

And depending on what's happening with spreads, interest rates in the markets, that's going to affect that.

So is that sustainable?

A lot of that is it's like any other banking business on the level with deposits and interest rates.

As far as the Trust and Securities Services business, there's fee income there.

What we saw in the first quarter and a little bit in the second, and what we may see continuing is last year we were winning many new mandates in the MBS and ABS area; we saw that slow down in the first half o this year in the first quarter.

Some of that was replaced by increased ABS activity.

So I don't know how to forecast what's going to happen to the rate of growth, but we expect that the revenues there will remain relatively constant as to where they are, but we'll have to see what happens in the markets.

Okay, thanks very much.

The next question is from Mr.

Dieter Hein of Fairesearch.

Please go ahead sir.

Yes, good morning.

I have two question, one on the German [government] tax reform which passed last month.

So what is your assumption regarding your tax run rate from 2008 onwards?

And do you expect any material one-off effects in the third quarter this year out of this tax reform?

And second question, it's regarding IKB Deutsche Industriebank which got some troubles over the week, and there are information that one big German bank cancelled its credit line to IKB.

So my question is, were Deutsche Bank or are you involved into this IKB case?

Thank you Dieter.

As far as the tax reform, we do anticipate an impact in the third quarter tax rate.

The tax rate will probably go down to somewhere in the 33%, 33.5%, I forget exactly what, based on the numbers we looked at, so not a material number.

And what that's going to come from is the adjustment of the net deferred tax liabilities we have, which were accrued at a higher rate and those'll get adjusted.

So that is a one-time effect.

As we've said on other occasions, there are some offsets.

So the full impact isn't going to come through, plus we have 20%, 25% of our profits in Germany.

So whatever impact there is, will be mitigated by that effect.

With regard to your second question, our policy is not to comment on any dealings with individual clients.

So unfortunately, we cannot comment on that.

Okay, thank you.

Thanks Dieter.

The next question is from Mr.

Matthew Clark of KBW.

Please go ahead sir.

Morning, two questions.

First question, just whether there's any asymmetry in recognizing trading gains where you've got a mark to market of the hedging derivative, but the underlying is either moving more slowly than the hedge could be because it's an overcrowded index that you're using to hedge, or just because no default event has happened.

So is there any sense where you have a boosted trading result this quarter that could be offset by writedowns in subsequent quarters?

And second question is just again on the investment banking costs.

If I get you rightly, you're saying that costs and revenues moved in step on an underlying basis year-on-year?

But given revenues have moved up so much, I'd have hoped for some kind of operating leverage to come through.

Is that wrong and should we not expect there to be any operating leverage on large revenue increases such as we've seen over the past 12 months?

Thanks.

You're welcome.

Matthew, as far as the trading gains, I don't know that I can make an observation as to the asymmetry.

What I can tell you is we mark positions in exposures in our trading books whether long or short, whether the hedge or position we're looking to hedge based on the estimates and the values as I described earlier, not just on mark to model, but overall.

So whatever the values are that's what we record, and I don't that I can shed any light on whether there is asymmetry or trailing effects or not.

With regard to CIB costs, we are continuing to make investments as well.

And we're growing our commodities business, we're growing our prime brokerage business, so there's a whole series of things.

We do look at the costs carefully.

I know that there's been questions as to how quickly, if things turn down, we can adjust that.

We continue to have discussions with as recently as our last quarterly review meeting, in terms of where we see things going which was just last Friday, which we do every quarter with every business.

And we're attentive to it and we would look to adjust costs if we see that not just on our short period, but that strategic investments that we're making, are -- should be cut back.

Okay, thank you.

The next question is from Mr.

Joachim Mueller of Cheuvreux.

Please go ahead sir.

Yes, good morning Joachim Mueller, Cheuvreux.

Three quick questions; one is could you give us the number for what your CDO exposures with sub-prime underlying?

Secondly, do you have any investments in conduits or SPV type of vehicles where there's any potential for where you are providing liquidity maybe that will come off on your balance sheet in case there's something happening at that investment?

And then finally, could you just comment on the warehouse development for asset securitization or leveraged deals where that has been going and whether you have adjusted that?

Thank you.

Our CDO exposure, let me just add or reiterate what I said earlier, we reflect in our P&L and in our financials the impact.

What our position is and what the size and whether its net long that short, is a matter of proprietary information.

We're active in this market as are many other banks.

No-one discloses that in the trading and market making area, and so I don't think we will.

As far as the conduit exposure, I mean that's a pretty open ended question.

There's -- I don't know how to answer that.

We're dealing in the business; we haven't shut anything down.

We've always been prudent; we continue to be for both that and the warehouse.

The only thing I'd add is that we monitor, and from the day someone starts that business there's the potential that something could come on your balance sheet with regard to the Conduit business, or something could happen on the warehousing business.

So the thing I'd add is we watch things.

We've got policies, we do it prudently and I don't know that I could answer that question just beyond that.

Okay, thanks.

The next question is from Mr.

[Phillip Zieschang] of UBS.

Please go ahead sir.

Morning, three quick questions please.

The first one is with respect to your full percentage disclosure on the leveraged lending business.

Is that related only to debt origination fees?

Or is part of that also in the credit sub-revenue line related to debt sales and trading?

In that sense as you've -- on the same [conduct], as you have disclosed this number, could you just comment on the relative importance revenue wise of the CDO business which should also sit in your credit business?

Again, the sub-position of debt sales in trading and credit make some 16% of Group revenue.

The second question is on Asset and Wealth Management, could you just comment briefly the relative improvement Private Wealth Management versus Asset Management?

It was highlighted that net of one-offs there was an improvement.

Is it balanced?

Is both of them contributing at a similar degree or is there a gap widening?

Third one just quickly, your effective dividend payout I think was [EUR36 million] in 2005 and [EUR37 million] in 2006.

Could you just comment what you are -- or what the range is [that you see today]?

Thank you.

Okay Phillip, the -- on the leveraged finance, the revenues as far as I know are all in the origination debt, to the extent some of our trading desks might be trading paper.

There might be some trading, but I don't think we track that as a separate item.

So it's in the origination debt line.

As far as the CDO revenues I don't have a number as to the percentage in that, but maybe Wolfgang or somebody else can look up and see if we could find something here.

With regard to Asset and Wealth Management, our Private Wealth Management business had a material increase over the first quarter in terms of its pretax, but of course, that's a smaller piece of the total.

And so in terms of the overall, let me just look something up here, I think the Asset business, Asset Management business, had a larger contribution, but, let me just see, yes it did.

It had a higher contribution than in the period last year.

As far as the dividend payout, the figures shown here and the numbers we use to calculate our Tier one ratio assumes that our payout ratio will remain, I think it's at 37% diluted to earnings per share.

Just quickly, the comment you've made in terms of asset management at a higher contribution, is that related to the growth?

The growth from the second quarter last year was higher in Private Wealth Management that in Asset Management, because don't forget last year, I said I the second quarter, we had a very substantial level of performance fees.

So even with performance fees this quarter, the change is going to be higher, but in the absolute terms the contribution from Asset Management is higher than from Private Wealth Management.

Thank you.

Thanks Phillip, next please.

The next question is from Mr.

[Carsten Werle] of Oppenheim Research.

Please go ahead sir.

Yes, [Carsten Werle] good morning.

I think we had some quite spectacular on moves on the credit defaults swap markets in recent days and particularly on Friday and Monday, where we also saw quite significant widening of spread levels for Deutsche Bank.

The first question would be, is there anything what we in the equity market do not see which the credit market sees?

Was there any impact on the cost of liquidity for Deutsche Bank on these two days?

Was there any impact on businesses where you are counterpart risk to other partners' matters, like money markets, swap markets and are there any precautionary steps that you could take to prevent negative repercussions in future?

Carsten, in answer to your question, I don't know of any impacts on liquidity.

I haven't heard of any and I think if there were some issues, I think we would have heard.

Likewise with counterparty risk.

So there's nothing I'm aware of.

Carsten, The answer is no.

Okay.

Okay, thanks.

Next one?

The next question is from Mr.

Christopher Wheeler of Bear Stearns.

Please go ahead, sir.

Yes good morning, morning Tony.

Two really quick questions.

First of all you've talked about the 4% revenue exposure to leveraged finance on the equity origination line.

Do you want to give me any comments on what you think the impact is on the advisory line, in terms of the activity there from the financial sponsors and obviously the flip on from the deal to the funding.

And secondly, just in terms of the risk weighted assets, the 8% increase, I'm not sure if I missed something here, but can you tell me whether or not any of that actually is down to the fact that you've seen your advisories creep up both in terms of the leveraged finance deal and also in some of the other asset backed deals in terms of your warehouses?

Or whether that, if you look at the two figures end of first quarter and second quarter, that it's more natural (inaudible) in the business.

Okay.

I don't have a number, Chris, as to how much is in the advisory side.

My sense is that it would not be, that from the leveraged finance, it would not be -- let me just go back to something here, it would not be major.

If I look at the deals that we closed during the period, I don't know that the advisory business, but I don't have all the data here.

My sense is that most of the impact would be in the origination line, but why don't we just have Wolfgang and his guys take [you] through that and see if they can get back to you.

Okay, sir, no problem.

As far as the risk weighted assets are concerned, on the loan increase, the distribution was spread across several businesses.

LEMG had the largest increase, but that comes from the normal [loan] activity and that's not the leveraged finance book.

As far as the other areas of growth in the loan component compared to the first quarter in PBC, which increased their loans, transaction banking, which saw an increase on commitments they have as part of their businesses and there's some in global markets, that area just on structured, structured products.

So based on the data that I have available and discussions I've had, it's not due to taking leveraged finance loans on our books.

And has it become anything of a problem in the last month?

How are you managing that in terms of what one has to assume, obviously, the fact your inventory has gone up in the last 30 days or so?

I don't know how much, if we are going to be able to sell or what we're going to be able to sell, but as I said before, if we do have to hold some for some time, before we issue the commitment, we looked at these as if we were going to hold them anyway.

What impact that's going to have on RWA at this point I wouldn't conjecture.

Okay, thanks Tony.

You're welcome, Chris.

The next question is from Mr.

Stuart Graham of Merrill Lynch.

Please go ahead, sir.

Oh hi, I have a few questions.

Just coming back on the sub-investment grade lending commitments, your US peers actually do disclose that stuff in the 10Qs and the average figure seems to about $50 billion.

Given you're a commercial bank, I'm guessing your exposure would be bigger than that.

Maybe you could comment?

The second question is, your US peers also give an interesting disclosure under SFAS 157 of the hierarchy of their fair value assets, this level one to three stuff.

And I know you're not US GAAP anymore, but the average asset mix seems to be 25% level one, 65% level two, 10% level three.

Given you intellectual capital mix, I'm guessing the assets in the CB&S division would be a higher weighting to levels two and three.

Could you comment on that?

And then finally, if you woke up tomorrow and decided to remark your books using synthetic pricing guides, such as the ABX for your ABS, the TabEx for your CDOs and LCDX your levered loans, what do you think the order of markdown on your P&L would be?

Are we talking hundreds of millions of euros or we are talking billions?

I guess you've done that very conservative stress scenario test.

Thanks.

On the sub-investment grade, I don't have the number with me.

I don't know what the others disclose, so I don't know what to say there.

As far as, what was the question on the mark to market?

On the mark to market, if you're using synthetic pricing guides rather than cash pricing guides, if you use like ABX for your ABS, the TabEx for your CDOs, LCDX for your levered loans, what sort of markdown would you have?

Would you be talking hundreds of millions of dollars do you think or would you be talking billions?

Again, I don't know the answer to that.

I think we use whatever guides and whatever inputs that we think are representative of the values of the exposures.

So we do, on a regular basis, go through stress scenarios as part of a regular risk management and we see what happens in stress conditions and that's where economic capital calculations come in, but I don't know.

And as far as remarking the book, I reiterate what I said.

We mark our exposures based on what we believe to be fair indicators of its value and I don't know what the result would be if we were to remark on a different basis.

On the SFAS 157 split of the book?

We will be disclosing that at the end of year because we are required to; we're working through that now.

We don't manage or -- we have some estimates, but rather than give you a number that is incorrect, we will be disclosing that in our 20F at the end of the year.

Just from a common sense perspective, should I assume you're going to be more weighted towards the level two and three, given your intellectual capital mix, or is that not in an assumption I can make?

I wouldn't even conjecture that now because I don't have enough information at this stage to determine that.

Okay, thanks.

You're welcome.

The next question is from Mr.

[Dirk Kanders] of WestLB.

Please go ahead, sir.

[Dirk Kanders] from WestLB.

A quick question on the loan products line.

You said you applied there the fair value option, and normally I would have thought that given the increase in the spreads, this line would have benefited from the market environment in Q2.

Why is there now a lower number?

The effects, the only thing I can tell you is that we applied the fair value option, there was increased loan activity; it was not leveraged finance activity.

And as a result of the application, the fair value on the loans, we had a reduction in the loans.

But that didn't come from leveraged finance, it was a mathematical calculation in terms of the fair value.

But --

We indicated -- the other effect here, we indicated if you compare it to the first quarter --

Yes.

We've indicated in our disclosures then that our loan revenues in that quarter benefited from gains we made on the sale of equity that we received on restructured loans.

So part of the effect from the first quarter is the absence of those gains that we commented on in our first quarter release.

Is that okay?

Okay, (inaudible) what's come from the leveraged finance business, so I'm a little bit puzzled.

No, that's a wrong perception.

Yes, okay.

The next question is from Mr.

Dirk Becker of Kepler Equities.

Please go ahead, sir.

Yes, good morning.

Two questions please.

The first would be the value at risk.

I notice the value at risk has risen quite sharply in the second quarter, particularly on the equities side.

So I'm wondering if there are any technical reasons for that, or did you really take more risks on the equity side?

And then I would be interested to understand whether you got rewarded for this through higher prop trading gains.

And secondly, I'm not trying to square your comments on that you're very happy with the performance of sales debt and trading in July with the fact that we had some quite significant market downturns in July.

So maybe there have been some parts of the business performed better than you thought or than market expects and I was wondering whether you could identify these sectors?

As far the VAR change, I don't know of any technical changes that are reflected in these numbers.

It is an increase in the number and it was due somewhat to equities, but also to credit risk that we took.

As far as sales and trading in July, again this is not a forecast for the quarter, but, and I don't think now is the time to get into details as to where the results came, but we're pleased with the performance of our business in July.

In the equities prop trading result?

In what, in the second quarter?

In the second quarter.

We had a gain and it was somewhere in the range of under 150.

Thank you very much.

Okay.

Thank you Dirk.

Next one please.

The next question is from Mrs.

Reingen of Execution.

Please go ahead, ma'am.

It's Anke Reingen from Execution, just two quick questions.

First on the strength of fixed income, as you said, infrastructure was a big contributor -- was a key driver here.

Can you give us some sort of indication how much it contributed?

And also, is this like more lumpy business than in a way fixed income revenues already are?

Is it like [peer] related?

And also can you confirm that the prop part within unfixed income is in your usual range of 10% to 15%?

Secondly then, on the costs ratio, sorry in CIB again, going forwards, should we more think about the ratios more in terms of H1 levels or Q2 levels, in terms of what you would target for the rest of the year?

Thank you.

Thanks.

As far as the infrastructure business, we had one principal transaction; one transaction accounted for most of that.

It's somewhere in the, I don't know I think maybe in sales and trading debt about 150 contributed there.

It is a lumpy business and it'll come when we sell transactions or positions or assets that we've bought.

The prop fixed income; the designated prop is running, as I said earlier, in the range that we've guided.

It ran in the second quarter over the cycle.

As far as the cost income ratio, your question was is it the first quarter or the second quarter?

The first quarter's revenues were significant and they were higher than the second and that certainly attributed to part of it.

A lot of the change in period to period is going to be based on performance compensations, so that will be addressed.

And depending on the revenue base, we may see some increase in that number, but we're mindful of it.

And if we believe that there's a change in market conditions then we'll address both the non-comp as well as the other cost elements.

But should we think about more going forward for the rest of the year, more like H1 levels for comp and non-comp ratios, or more like Q2?

Probably Q2 and you know, third quarter might be even a little bit higher depending on what happens to revenues, because it's a slower quarter.

But if you look at the year and if you look at what our goals are in terms of achievement, we would see that over time -- you don't make strategic decisions based on a single quarter.

If you were to look at last year's number, you'll see that the ratio in CIB was 68 for the whole year, but it ranged from a high of 73 to a low of 63.

So if you're asking me to look quarter-by-quarter, I don't think we would necessarily manage our business or our spend or our strategic plans on a quarter-by-quarter basis, but we would look at it over a longer period of time, a year or two years.

We'd look at what the effects are.

Thank you.

Okay, thanks Anke.

We are prepared to take one more question.

The last question is from Mr.

van Steenis of Morgan Stanley.

Please go ahead, sir.

Hi Tony, it's Huw van Steenis.

Two quick questions, first on leverage loans, could you give a bit more color on your hedging policy?

I know that many players in the market don't hedge their underwriting book, but then do aggressively hedge their secondary book through LCDX and the like.

Should we take it that you actually, given you're smart traders, may have actually already been using macro hedges of LCDX on your primary book and that's why you're feeling so comfortable marks?

And then number two, maybe on a more positive not, I'm particularly struck by your very strong growth in emerging markets, Asia and Europe.

Do you have any more update as to a regional split of where your earnings are coming from and particular the year-on-year growth in emerging markets and Asia?

Thanks.

With regard to the leveraged lending book, we don't hedge it in the business.

There may be some macro hedges in other parts of the business that would offset with any changes.

We're comfortable with our exposure at the end of the quarter, not because of hedging, but because we did go through a very thorough discussion, which was vetted not only with the business, but with credit risk management in terms of their view and where appropriate, we took some charges.

Any fees on that business we defer until the commitment is sold, so the only way we can go is charges during the commitment period and we're comfortable for that reason.

As far as emerging markets debt, as we've said in the disclosure, we saw growth in three primary areas, Russia and Turkey as well as Latin America.

Is that okay Huw?

Yes, that's great.

And sorry, just one last thing, in emerging markets more broadly across the whole business, equities and credit, has that been a particular standout success, or was it particularly in the debt area?

I don't know what we -- I don't have the data here in equities except we did have, and again we've disclosed this, good growth in Asia.

And I don't know if that's from emerging markets or otherwise, but I don't have anything more detailed than that.

Thanks ever so much.

You're welcome.

Okay with that we would like to close this call.

I think 80 minutes demonstrate the interest of the market and we appreciate your question and if there's anything been left over, please feel free to call into the IR team.

Thank you.

Thank you very much.