Deutsche Bank AG (DB) 2007 Q3 法說會逐字稿

Yes, thank you.

This is Wolfram Schmitt.

Good morning.

It is a great pleasure for me to welcome all of you to our third quarter call.

With me is (inaudible) Tony di Iorio, who will perform this call and give a presentation and answer your questions.

As usual our disclosure today is supported by a variety of documents.

The earnings release, a financial data supplement, the full interim report and a set of slides which we will refer to.

All products, as you know, are carrying the usual disclaimer regarding forward-looking statements.

In the interest of time I will not read that out to you, but I trust that all of you will have read it before we start.

With that, Tony, I think you start your presentation and then we will go into the Q&A session right after that.

Thank you Wolfram.

And good morning, everyone.

As we announced this morning, our earnings in the third quarter of 2007 were EUR1.4b pre-tax, EUR1.6b after tax and these numbers are disclosed on page three of our Analyst presentation.

The quarter was characterized by a loss in trading positions in Investment Banking and in fact, an overall loss in the CB&S segment reflecting the impact of market conditions.

We are pleased though, that the stable businesses of Global Transaction Bank, Asset and Wealth Management and the Private and Business Clients segment performed very well with earnings of EUR832m for the quarter.

We also had strong contribution from Corporate Investments and a positive impact from tax credits and I will go through these in detail in just a minute.

We are happy also to report that our Tier 1 ratio for the quarter was up, was 8.8%, and that, we believe, demonstrates our commitment to strong capital management.

Before I get into the details, I just want to reflect back on a disclosure we made on October 3 regarding the anticipated results for the quarter and just compare those to where our results for the quarter are.

On October 3 we indicated that our expected pre-tax income would be EUR1.2b, and in fact, it came in at EUR1.4b.

Our net income, we said would exceed EUR1.4b, and it did at EUR1.6b.

Our CB&S segment, at the time we forecasted would have a loss of between EUR250m and EUR350m, and the loss was EUR179m.

Our sales and trading in three selected areas that we highlighted, we anticipated would be in the range of a loss of EUR1.5b.

In fact, the number is EUR1.560b.

And finally, on leveraged finance, we said that we expected a write-down of up to EUR700m in the quarter, and the write-down, in fact, was EUR603m.

As we go through this presentation, we're also going to provide additional exposure -- information on the exposures that we had at the beginning of the quarter and where we ended at the end of the quarter.

On Page 4, you can see what happened with our pre-tax -- our ROEs, rather, 19%, which we said our anticipated, or our target was 25% over the cycle, and the 19% helped us, or contributed to a reduction, but still for the nine months we are at 33%.

Our diluted earnings per share are at 11.13%.

If you turn to Page 5, we present the same statistics on a target definition basis, and this excludes some gains in our Corporate Investment sector -- segment principally.

And as you can see from the chart, the target definition, pre-tax ROE for the quarter was 12% as compared to 25% for the third quarter last year.

And our EPS, on a diluted basis, was EUR1.76 for the quarter compared to EUR2.11 for the prior quarter.

Turning to Page 7, income before taxes, we report a decline of 19% from the third quarter last year, although the mix of these earnings is very different because of the circumstances in the third quarter.

So that's the EUR1.4b I commented earlier.

On the full year basis, we are up on nine months 14% compared to the prior year at 7.3%.

Within these numbers, we had EUR606m of gains in our Corporate Investment segment.

EUR305m of those relate to the sale of Industrial Holdings and then recent investments, the [Washer] Bank stake, the option on that stake, rather, which is a derivative that's managed or carried in Corporate Investments, and the gains -- the final gain on the sale of our building in 60 Wall Street, New York, were EUR301m.

In the third quarter of '06 the Corporate Investment sector contributed EUR216m, so while we had EUR600m this quarter, that number is up from the EUR217m from last year.

If you turn to the next page, 8, we disclose our net income, which is up 31%, to EUR1.6b, and in fact, higher than our pre-tax.

And as we indicated in our earnings release, there were three principal reasons for that.

The first is the one-time impact of the change in German tax law on our provisions for deferred taxes, which had been accrued at the higher rate, so that was re-measured and adjusted this quarter, and that was a credit.

The second is the utilization of some capital losses, which in the United States can only apply against capital gains.

We did have capital gains, principally on the sale of the 60 Wall Street building, and so we were able to reflect those this quarter, the effect of those capital losses, and finally, through the resolution of some outstanding tax matters with the Revenues.

So as a result, we showed that increase.

On a guidance basis, the rate for this quarter probably -- would have been, not probably -- would have been below 30%, absent these items, and a lot of that is due to a reduction in our global rate mix, because many of the losses that we experienced in CB&S, particularly were in the U.S., which is our highest tax jurisdiction.

So the rate would have been just under 30%.

Going forward for 2008, we reiterate our guidance of 33% to 35%, so the tax rate this quarter, even before these charges, is lower than what we would anticipate it being as we go forward.

As we indicated in some earlier calls, only about a quarter, 20% to 25% of our income, is earned in Germany, so the impact of the reduction, apart from this one time large benefit, would be smaller in future quarters, going up.

If we turn to Page 9, you can see what happened to our net revenue -- our revenues, which are down 20%.

Again, we'll talk about this in a little bit, but this is driven by the reduction in CIB, CB&S principally.

The one thing that I would tell you in this quarter is that our regional diversification and the growing diversification has helped, so the percentage of our revenues coming from Asia Pacific are up from the prior quarter.

And then in Germany, we showed an increased revenue as well, due to both the favorable economic conditions here, as well as our expansion in PBC with the acquisitions.

The following page, Page 10, shows the breakdown of our earnings -- net revenues, rather, as to source.

And on the left-hand side of the chart, you can see our stable businesses, GTB, Asset and Wealth Management and PBC, which together contributed EUR3.2b of revenues.

CB&S, after those write-downs, was at just under EUR1.3b and the CI is -- Corporate Investments, is EUR654m.

The Consolidation and Adjustments column, and I'll talk about this later, is impacted by a VAT recovery, which is a credit, as well as recovery of some insurance claims we made on previously settled legal matters, and then offsetting that are mark-to-market versus accrual adjustments that we normally make to bring our management accounts in line with IFRS.

That said, if you turn to Page 11, you can see the change in our revenues from the third quarter last year, down 20%, with the largest change being in CB&S, and then increases in our stable businesses, as well as in CI.

Turning to non-interest expenses, they're down 22%.

On the comp side they're down EUR1b from the prior year quarter of EUR2.7b, and more than that for the second quarter, and let me talk to you -- that's driven by lower performance-related compensation, particularly in CB&S.

And let me describe how we did not change methodology.

We applied consistent methodology throughout.

The way we accrue bonuses is we calculate for each business the net income before bonus for that business, on a year-to-date basis.

And then we apply a formula, which varies according to business, and then record in the current quarter the difference between that result and what had been accrued in the prior period.

So in CB&S, we in effect -- the -- because the pre-tax income before bonus was down for the year, we took back some of the bonuses that had been accrued in the first three quarters.

When we get to the ratios, the cost ratios, and I'll refer to this again, we expect the number to go back to our run-rate for the first half of the year of about 44%, both in the fourth quarter and perhaps 43% to 44% for the full year.

So that's the issue there.

We did not change, or do not anticipate changing our distribution between cash and stock, and in fact, we applied the same assumption that we did in the first half of the year to the third quarter.

On the non-comp, we show EUR1.8b, which is flat with the third quarter last year, but down from the run-rate in the first half.

And this is where those two adjustments that I alluded to earlier are booked.

The EUR1.8b is EUR1.845b.

We had a recovery of that, based on a modified method of reclaim, which we have discussed with the tax authorities, and they have agreed, and that number was just -- was EUR138m.

In addition to that, we had insurance recoveries on previously paid -- claims we had previously paid on legal exposures of EUR81m.

So the number for the quarter would have been EUR2.064b absent those, and that is consistent with our run-rate.

We've spoken to our businesses and our infrastructure managers about the need to focus on this for the fourth quarter, and preliminary indications, based on forecasts, our third quarter reviews, indicate that they are focused on it.

On the year-to-date, our non-interest expenses are EUR15.9b, are up 8%, and I should mention that that is compared to a 10% increase in revenues.

So what this shows is that while our comp cost base is flexible to the extent we can with performance, that our non-comp requires constant diligence and monitoring, which we're all focused on.

At the same time, we are expanding in some of our businesses, and so that involves both comp and non-comp.

But that's the explanation of the return.

I talked about the cost/income ratio, so for the quarter the overall ratio is 69%, and the year-to-date 68%, and if you were to look at the comp ratio, the 33% is a result of what I just described with regard to the performance comp, and as I said, that number will probably revert to the first half average in the second year -- in the fourth quarter, assuming normalized business conditions.

Our non-comp ratio is up from where it had been, and this demonstrates the effect of lower reported non-comp, were more than offset by the reduction in revenues.

If we turn to Page 15, you will see the effect of our segments.

CB&S, as indicated earlier, reported a loss of EUR179m, which was below what we had announced on the preliminary figures of October 3, and our stable businesses, GTB, AWM and PBC, show good increases, and we discussed both CI and the Consolidation and Adjustments.

The following page is presented just to have you focus on the improvements in our stable business, income before taxes, so that in the year 2006, we had produced -- they had generated EUR2.6b of pre-tax, and so far this year, they've generated EUR2.4b, and we're very pleased with that result.

If we turn to CB&S, Page 17, you can see the details of the EUR179m, the loss I just alluded to, and we'll talk about in Trading -- in Sales and Trading, and in Leveraged and Corporate finance, the effects here, but I'd like to focus just for a minute on the composition of the write-off that we announced of EUR1.560b.

And we said that that was in three principal areas, most of it.

So of the EUR1.6b, half of it, or approximately EUR730m, was in our designated prop strategies, and that included both fixed income and debt.

And the mix there was about 60%, or EUR400m or so in credit in the fixed income prop, and about EUR300m in the equity -- designated equity prop.

The second area was the CDO correlation, where the loss was about 30% of the EUR1.560b, so that's about EUR465m.

The third was the RMBS business, which includes sub-prime, but also includes prime.

And as we indicated, although we're not exposed on an overall basis, because we've been net short the sub-prime, we did experience some basis risk effect in the third quarter, when the correlation between our short positions and what happened on the long positions, and we'll get into that in a minute, didn't react as they normally would.

In addition to that, we had losses of about 5% of the total, or about EUR100m, in other strategies dealing with -- principally with fixed income.

So that's the composition of the EUR1.560b.

I can tell you that throughout the period, we applied accounting and valuation principles consistent with what we have in previous periods, and we will continue to do that.

One additional comment, we included in this number, and it's in our Sales and Trading debt number, is EUR22m of mark-to-market gain on our own debt.

We applied the fair value option on a very selective basis, and that's why that number is substantially smaller than what you perhaps have seen from other disclosures.

Turning to Sales and Trading debt, the result here was a reduction of 71% in revenues, from EUR1.980b to EUR576m.

We've indicated that the credit piece here, which includes both the prop as well as our CDO book, was down for the period, and the write-downs for that period -- for the period were based on exposures, and let me just cite some numbers to you.

On the CDO book, at the beginning of the quarter, we had notional exposure, excluding RMBS, but including sub-prime -- we have a separate book for RMBS which is principally prime mortgages and securities.

The exposure was just under EUR10b at the beginning of the quarter.

Of that, we were net short just over EUR1b.

At the end of the period, we had managed that exposure down, and at September 30, the CDO correlation exposure in global credit trading was less than EUR1b, with the sub-prime exposure remaining at just over EUR1b net short within that number.

What we saw during the period is although we brought our net exposure down, because we were net short, at the end of August, when the United States Government announced support for the sub-prime position, the cash position values remained relatively unchanged.

However, we had significant losses on our net short position, which is principally -- it is the ABX.

Because of this dislocation, and because of the anticipated dislocations between the cash and derivative markets, we had a practice -- a policy throughout the month of August of bringing those exposures down, looking to cut our net exposures.

We continue to manage the net longs down, and to reduce the basis risk, and although on a hedged basis we remain net short, the sub-prime, there still is basis risk because there's no assurance that the tranches are going to move in a correlated way, which is what we saw at the end of August.

So that's what contributed to those effects.

In our mortgage back book, we also had losses, and some of this came from sub-prime, although as I've said, in our total exposure, as of the end of the quarter, we had a very small sub-prime long, and it was down in less than single digits.

And we have throughout the quarter been looking to bring down the prime exposure as well.

We did bring it down, and we about halved it, and we're still managing that at the current time.

The negatives in credit and the mortgage backed trading were offset by substantial performance in our FX and money markets business, where we saw customer trading revenues up, and I think the depth of our client relationships and the scope of our operation in these areas stood us very well there.

We also saw improvements in our Rates business, as we experienced -- as we were the beneficiary of a flight to quality in that business.

With regard to Sales and Trading equities, we showed a reduction in net revenues from EUR690m to EUR428m, and a substantial portion of that was due to the losses that I referred to earlier in our designated proprietary book.

In the third quarter last year we had a very -- we were almost flat in designated prop, and this quarter, we had a loss, and as indicated in the chart, the losses were due to dislocations.

Again, our strategies were long-short as well as net long equity in certain other strategies.

We lightened up on our short positions, in the anticipation that the equity markets would decline.

The equity markets improved, and so we suffered some losses on our hedges in the proprietary book, but also the losses we -- the derivative shorts we have in our Equity Derivatives business, which contribute to a reduction in the revenues in that business from the third quarter last year as well as from the second quarter.

Nevertheless, the Equity Derivatives business was helped with a strong performance in our retail structured.

So the inherent business activities in many of our strategies were positive, and contributed in both equities and debt during the quarter.

But the volatility and the dislocations, particularly in expected and normalized correlations, led to losses both in our debt as well as in our equity trading.

Cash equities showed strong performance in non-Japan/Asia and we're pleased to report that our Prime Services business showed a good improvement, and this is due to significant new mandates, and to new segments that we've broken into.

If we turn next to Origination & Advisory, and I'd like to make some comments on our leveraged finance exposures before getting into the P&L.

If you look at the table on Page 20, we show the development of those commitments, and the analysis of the nature of those commitments in the second quarter.

On September 5, in a speech that Joe gave at a Handelsblatt conference, we disclosed a number at that time of loans to sponsors of EUR29b, and you can see that in the October 31 numbers.

Now, let me put that into context.

At the time that we disclosed that, there were discussions in the market, and other disclosures, about the size of the leveraged finance pipeline, and the numbers we saw, discussed loans to sponsors, so to put out a number that was consistent with what had been talked about in the market, we stated at that time the EUR29b.

However, as you can see from the chart, we also had other commitments, other loan commitments, and we had bond commitments to both sponsors and others, and that was a pipeline of EUR43.7b, with equity bridges of EUR750m.

At September 30, we were at EUR41.4b of total commitments, and you can see the breakdown there.

There were some reclassifications based on negotiations among the categories, so that's why some of them decreased and some of them increased, and there's also an FX impact in sales, so the reduction from EUR43.7b to EUR41.4b includes a series of things, as I said, including FX and sales.

Most of the commitments, though, were still on the books in one form or another, and as you can see to the right, the breakdown between our classification of that EUR41.4b between trading and loans held.

And as you can see, less than 3% of our -- or about 3% -- less than 3%, I should say, of our total commitments are in loans held, which means that more than 97% will be treated as trading assets and mark-to-market, and I think it's important just to understand how we came up with this breakdown.

At the time a commitment is made, there is an intent provided by the business as to how much of that they expect to sell, and how much of it they expect to hold.

The numbers that you see, the EUR1.3b, is the amount that the business indicated they wanted to hold, at the time they proposed the commitment.

What's important about that is that we did not move intent during the period from trading to loans held to avoid a mark-down, because it was only the loans in trading that are subject to mark-down.

However, the loans held are subject to a general valuation calculate -- deduction or charge, in our loan provision.

So the important point there is that we did not change our intent.

We did not move assets into categories that would not be mark-to-market, but we marked as we had originally intended.

In terms of the EUR41b, EUR14b is funded, and EUR27b is unfunded, and if you look at the table on the bottom right of the page, you will see the expected funding period of the EUR27.5b by quarter.

If you look to the left of the page -- oh, let me comment on one other thing.

Our equity bridges at the time that we announced on September 5, were EUR750m and the latest number, although this changes day to day, because we're selling it, is now down to below EUR350m, and there's been no material change in the commitments.

So that's exposure.

During the quarter, we took write-downs of EUR603m, against these commitments, and that brings our year-to-date write-downs, net of fees, at EUR715m.

We've indicated that in the second quarter, our write-downs were not insignificant.

They were EUR112m, and so the gross write-downs, including fees that we will not earn, were 3.6% of our trading commitments.

So that number relates to, if you go to the right, the EUR40.1b of the commitment that's in trading, because the loans held are not subject to write-down.

They're accounted for at cost, at amortized cost, net of credit impairment.

With that said, let's turn to Page 21, where you can see the origination and advisory effects.

The numbers are down totally from -- total revenues from the third quarter last year by 77%, so from EUR642m to EUR148m.

The bulk of that is in our high yields, where we reported a net charge of EUR603m.

And as you can see, the origination on the right-hand -- on the left-hand side was only down EUR120m, and that is due to a couple of factors.

First of all, on our debt origination, we had some positive revenues that offset the EUR603m, so that we were just under EUR300m, on investment grade and other debt revenues, excluding the write-downs.

In addition to that, we had a very strong equity origination quarter, and you can see those numbers in the financial data supplement we put out, and likewise, record advisory revenues at EUR269m.

So the story here is we had the write-downs on the high yield.

By the way, in calculating those write-downs, we had an extensive process, including an independent pricing review program by finance, in consultation with valuation specialists from KPMG as to methodology and benchmarks.

We looked at indexes.

We looked at sales that were being made in the market by us as well as others, and we pretty much confirmed, based on that, the marks originally proposed by the business and by credit risk management.

On the advisory and equity origination, you can see on the right-hand side that we gained on equity origination in market share, and dominance, the number one position, in EMEA.

On advisory, our market share is up in the U.S., so our pipeline remains robust, and we gained a number one position in international bonds in the investment grade sector.

If we turn now to our stable businesses, the first of which is GTB, and as you can see from Page 22, we had a significant increase in income before taxes, 55% from EUR170m to EUR263m.

This was a record third quarter revenue and profit for GTB, with strong performance in growth in our domestic custody business, as well as a growth in our cash management businesses, where we believe we're benefiting from a flight to safety.

The business has performed very strongly in the nine months, and as you can see from the table, pre-tax profits are EUR724m.

If you were to go back several years and look at the contribution from this business, you can see dramatic growth, and that indicates the efforts that Werner Steinmuller and Michael Cohrs and others have put into both strengthening the bottom line, but at the same time being focused on cost discipline.

Asset and Wealth Management has shown a substantial profit growth, with strong money inflows.

So our pre-tax is up 45% from EUR182m to EUR265m.

The result looks like a decline from the second quarter.

However, I remind you that the second quarter had in it the gain on the sale of some of our businesses in Asset Management, and so absent those, we would have shown an increase in the pre-tax.

For the year-to-date, EUR744m, and so there have been some very positive developments there.

The results for the quarter have been helped by strong performance fees in Asset Management, in our retail asset management businesses here in Europe, particularly, and in RREEF.

Although I would add that on a year-to-date basis, our performance fees in this business, and we've commented on these previously as being lumpy, are down by more than EUR100m compared to where they were on the year-to-date basis last year.

PWM is enjoying the results from its investments last year.

2006 was a very difficult year for them.

Pierre de Weck, who runs that business, added substantial numbers of personnel, principally client-facing, or client supporting, and we're beginning to see the benefits here with both growth in invested assets, as well as growth in transaction revenues.

Net new money for the quarter in this segment was EUR13b, and for the year-to-date it is EUR32b, so very strong results in Asset and Wealth Management.

Private and Business Clients reported the best quarterly pre-tax results ever.

Up 15% from the prior year, from EUR264m to EUR304m, and this is due to strong revenues from our loan and deposit business, as well as an increase in our advisory businesses, so brokerage transactions.

Net new money in the segment was EUR4b for the quarter, and we've gotten 250,000 new customers.

We started a marketing campaign, in effect a reintroduction of norisbank in the market, and those costs are reflected here.

There will continue to be marketing and promotion costs in the fourth quarter.

We're beginning to see investments in our Polish businesses and PBC increasing, and we're continuing to invest in Asia.

Now let's turn to Capital and Risk management.

Page 26, you can see what's happening to our impaired loans, which are down from EUR2.5b to EUR2.4b from June to September.

Our coverage ratio on provisions -- on reserves is down slightly, but we don't think that that's an indication yet of a trend.

It's early, and if you can see the 64% is higher than any other quarter but the second, so it is an issue that we're monitoring.

The credit environment here in Germany has been positive, and if you turn to the next page you can see the effects on our credit provisions, which at EUR105m are up from both the third quarter last year and second quarter this year, but a lot of that is due to a reduction in the releases in CIB.

You can see them going from EUR42m in the second quarter this year to EUR19m, and from EUR27m last year.

And on PBC, that number is increased, but included in this quarter is an adjustment in Berliner Bank, leading to the full conversion from an HGB basis, German GAAP basis, of calculating the loan loss provisions, to an IFRS, and from the time we integrated Berliner Bank in terms of going through the records and establishing the basis, it took us several months to do, and so there was an increase included in the EUR124m.

Absent that, we would have been down, and just slightly above the third quarter last year, and I remind you that the third quarter last year did not include either norisbank or Berliner Bank.

If we turn to the next page, our capital management, because of efforts to control and hedge risk on a robust basis, risk weighted assets were up just EUR3b from the second quarter.

Our equity was up because of earnings and a hybrid issuance we did in the beginning of July, and as a result, our Tier 1 ratio, we're happy to report, is up to 8.8%, and that is very important for us because it not only indicates the result of a tight capital management, but it's also important for counterparts, rating agencies and others, to see how focused we are on this number.

One issue I'd like to comment on before going on to the other pages is our liquidity.

At the end of the second quarter call, I was asked a question about, did we experience any funding problems, and my answer was that I did not know of any.

Maybe I should have been more explicit or articulate, because some observers misunderstood that for a fallback from our stated goal of transparency.

We did not have any funding problems.

Funding is managed by Hugo Banziger as part of risk, so he's the Board member responsible for it, and his efforts, and those of Chris Whitman, our Group Treasurer, were very successful during the quarter.

And as a result, we consistently enjoyed excellent access to liquidity throughout the quarter.

Our efforts during the quarter were to lengthen out and latter out maturities, to reduce dependence on overnight funding.

And so we did do some term funding, and locked in funding, which we thought was prudent to do, and in fact, in some cases, Chris, working with our Global Markets colleagues, were able to tap into certain segments of the term market that had been dormant, in effect reopening those.

So we're very satisfied with the way liquidity has been managed.

We continue to have easy access, or not easy access, but access, excellent access.

And I should comment on one other thing.

As a bank with a large and stable deposit base, our funding risk is also helped in terms of that characteristic.

Turning to Page 29, let's talk a little bit about the future, and we don't make forward-looking statements.

But what we'd like to do, as Joe Ackermann said in a recent speech, we reaffirm our commitment to our stated strategy.

He indicated in the shareholder letter that accompanied the interim report today that we stay the course, although as he indicated, we may make some adjustments in individual business lines, to refocus resources toward areas with the greatest growth potential.

So the Phase 3 agenda remains intact, and if you turn to the last page of the prepared presentation, Page 30, we'd also like to reiterate what Joe said on October 3, that we reaffirm our commitment to our previously stated financial targets, which include, assuming market conditions are normal, our profit targets for 2008.

Our stable businesses have all confirmed commitments to their targets, although we believe it will be a challenge for PWM, as they do.

But they're still committed and working towards it, and as you see from the results, the stable businesses are making good progress toward those goals.

Performance in CB&S going forward will be linked to market conditions, and it's therefore very difficult to predict.

Nevertheless, and I spoke to leaders -- we have spoken to leaders in this business as over the last week.

They remain positive that market conditions seem -- are beginning to show signs of normalizing, although that is not a prediction.

But they're heartened, and remain focused on these goals.

Some of you might be interested on how the third quarter has started -- fourth quarter has started, and again we mentioned in the shareholder letter that October has started out very positively, and what I'd also like to add is that some of the businesses that had the biggest challenges in the third quarter are credit trading businesses, and our designated prop businesses have contributed, as well as others, to this positive start.

However, as I said on the second quarter call, it is early in the quarter, and so we would like to caution you not to extrapolate any positive sentiment we have now, although we are positive overall, to forecast, or as a forecast of fourth quarter results.

With that, I will end my prepared remarks and open it up for questions.

Thank you.

Thanks, Tony.

Ben?

(Operator Instructions).

The first question is from Mr.

David Williams of Fox-Pitt Kelton.

Please go ahead, Mr.

Williams.

Hello.

Good morning.

It's David Williams here from Fox-Pitt Kelton.

Obviously with regard to your comments just at the end about extrapolating into the rest of the quarter, UBS obviously yesterday was saying October got off to a good start, but they do expect further write-downs in the business in the Investment Bank.

I just want to ask, is there anything out there at the moment that makes you think you may have to take further write-downs on any of your positions really in any of the credit markets or otherwise?

That would be the first question.

And the second question would be, have you got a changed view on prop trading?

Obviously in the quarter it was difficult, probably, I guess on the comp driven models and positions, and that caused some of the losses.

Are you scaling back those positions and winding down some of your prop activities, or do you just see the quarter as an aberration, and would expect ongoing to have some contribution from those prop models as they were previously delivered?

David, as far as fourth quarter write-downs, we monitor positions on a daily basis.

We look at the markets.

We have marked both our trading positions and the leverage finance positions as realistically as we could at the end of September.

We believe that those are good marks.

Experience since has shown us that they probably are.

But I don't know -- there's nothing we anticipate, because if we had anticipated it, we probably should have recorded them at the end of September.

So we -- our marks are based on current market conditions and which could change.

As I indicated, although we're net short, for example, on the sub-prime, there is basis risk.

And what we saw at the end of August with the announcement, we could see other aberrations in that regard.

So at this point, if we knew of anything, we probably would have recorded it, so -- but that doesn't mean that there won't be, based on market -- or changes in market conditions.

As far as prop trading, we look at our strategies on a regular basis.

I don't think -- I think that there are some strategies, one that we've already shut down on designated prop.

We're looking at our positioning.

Our guys look at the markets and trends, and the best information that they have, and I think from time to time, those strategies change.

But a lot of that, apart from the change I mentioned just a minute ago, is based on market conditions.

I would add that on a year-to-date basis, we are showing positive results in both equity prop, which is down from the prior year nine months, but still positive this year, despite these write-downs, and designated equity prop.

And in designated fixed income, we're also showing a year-to-date profit, so that --

That's great.

Thank you.

Thanks, David.

Next please.

The next question is from Mr.

Jeremy Sigee of Citigroup.

Please go ahead sir.

Morning.

Thank you very much.

Could I continue a little bit the discussion since you've given it, about how 4Q has started, because it seems that a number of areas, particularly in the credit business, are still not functioning normally at the moment.

Markets are still pretty much closed.

So I just wondered if you could talk about that and which areas you're most concerned about looking ahead into early next year as well.

In the credit markets, as I indicated, some of the positive results so far have come from those areas that had big challenges in the third quarter.

And that would include credit trading.

We've taken down our risk significantly.

We are looking at opportunities all the time.

And so far I don't know that I would read the market in any way but the only thing I can report is that the results have been positive.

Okay.

And can I ask a second question on a different subject?

Just looking at your share buybacks, they've obviously been scaled back.

The buybacks that are taking place, are these intended for share-based compensation schemes or cancellation, or a mixture of the two?

It's probably a little bit of both but the principal -- at this time during the year except for to fund commitments to new hires, the share buybacks would principally be as part of our share buyback program.

Our biggest share buybacks would obviously come in anticipation of hedging the grant which will be made next February.

So it's a mixture of both, although I would probably lean towards a larger component being the share buyback program.

Okay.

Thank you very much.

The next question is from Mr.

Michael Rohr of MainFirst Bank.

Please go ahead sir.

Yes.

Hi.

Good morning.

It's Michael Rohr from MainFirst.

Just two questions remaining.

First of all on the remaining exposure, you've given us the details on LBO and CDO exposure.

However maybe I've missed that, can you clarify the exposure on the residential mortgage backed securities a bit more and how this evolved during the quarter and especially what write-off rate you took there?

And secondly a question on the staff costs especially on the personnel expenses.

We've seen that they fell off pretty quickly and I just wonder given the sharp fall-off whether there's anything special in there apart from your formula that you usually use?

Thank you.

Michael, the -- on the residential mortgage exposures, this is -- what's left on our books on the loan side is almost all prime.

As I indicated the sub-prime is a very small component.

Yes.

It's in decimals.

And as far as the prime, we've taken it down about to half of where it was at the beginning of the quarter and it's in the high single digits currently.

Although we're constantly moving this position, we're buying, selling, and I don't want to get into too much -- this is a very actively, as all of our positions are, managed book.

So I'd prefer not to go beyond that except -- because there are competitive issues here.

Sure.

As far as staff costs are concerned, as I said the third quarter was driven -- if you look at the accrual rates there are higher accrual rates in certain businesses than others.

So where our accruals came down because of the year to date adjustments we had -- those were the higher effects, higher percentages.

That said, we anticipate the fourth quarter to be back to our normalized but let me add a couple of things.

First, there is no bonus per se on the corporate investments P&L.

So because of the size of that in the current quarter you can't just look at ratios and that's why you have to look at absolute monetary trends.

In addition to that, we did benefit on the bonus accrual for one with the weakening of the dollar.

The net effect was less than EUR100m as I remember but nevertheless that had an effect.

So depending on what happens to currencies, depending on what happens to performance, we're going to see whatever the fourth quarter bonuses are.

We're not storing up bonuses to record them.

We've applied the formulas consistently throughout the year.

And that's the effect.

Alright.

Thanks very much.

You're welcome Michael.

Thanks.

The next question is from Mr.

Dieter Hein of Fairesearch GMBH.

Please go ahead sir.

Yes.

Good morning.

I would like to ask two or three questions.

First, I'm very interested on your personal opinion Tony regarding how reliable are the evaluation adjustments of the global investment banks in the third quarter.

Is it possible to compare for example the charges Goldman Sachs did with the charges of Merrill Lynch or with Deutsche Bank in your point of view?

And do you think we've got from the big auditor companies together with the accountants from the big banking companies together with the watchdogs like SEC general standards to evaluate all these items?

And the question regarding your evaluation adjustment of EUR2.2b.

Where did you use a mark to market evaluation and where mark to model evaluation?

Maybe you could break up in this [view] your EUR2.2b?

Thanks.

Okay.

I don't know that I'd venture a personal opinion but the fact that I'm the CFO and we're putting out the numbers.

Dieter, we would not have published these numbers if we were not comfortable with the valuations.

Now that said, in certain parts of our balance sheet there is judgment because you can't go out and find marks.

However in applying that judgment we have done it consistently with the way we've done it in the past.

There has been independent review away from the businesses by finance and market risk management.

We disguised -- we discussed this in our second quarter call as to our practices and policies.

We continued that fully.

So we believe that our evaluations are correct based on market conditions at the end of September.

With regard to the auditors, we've had extensive discussions with a number of accounting firms to help us interpret, principally with KPMG, but we have engaged in discussions with others as to how to apply valuation methods.

The accountants published a report, a white paper in the third quarter.

Three of them in fact, one of them on valuations, second on accounting for leverage finance commitments and a third on accounting for asset-backed commercial paper conduits.

In all three we compared what was said in those papers to what we were doing.

And we found that we were totally consistent.

So the methodologies we've used, which is not the only question you've asked, are consistent with the best thinking and the guidance provided by the accountants.

With regard to where we've used judgment or mark to model versus mark to market, we would wish that there would be more observable marks in the market.

That said, if you're at the leading edge in terms -- with other firms in terms of product development and activities, it is sometimes difficult to find observable marks.

We are preparing to disclose our level one, level two, level three data at the end of the year and I indicated this at the other quarter.

And although we're not ready at this point to disclose actual numbers, I can tell you, based on the analysis that we have done in preparation for the disclosure at the end of the year, our level three assets and liabilities are directionally proportionate to where the others have -- in the absolute and let me condition that -- in the absolute with where the other U.S.

firms have disclosed.

And the ones we've seen so far are the August quarter ends because we've seen that data in their 10Qs.

So, on an absolute level.

When we start publishing this number we're going to look a lot better as a percentage of assets at fair value.

And the reason for that is that IFRS requires a gross-up of certain trading assets, derivatives and others, liabilities that would be netted under U.S.

GAAP.

So the base against which the percentages will be calculated are a much higher base, therefore the percentage is a lot smaller.

And I've mentioned -- and that's why I think we've got to focus and we should all focus on the absolute number.

But it is -- it is directionally the same in absolute terms.

But we'll deal with that at the end of the year.

Okay, Dieter?

Yes.

Dieter?

Can I make a quick announcement.

I'm hearing from the moderator about the long queue of attendees who would like to raise a question.

May I suggest ask if everybody limits to one question as we want to serve everybody.

Thank you.

Let's go on.

The next question is from Mr.

Philipp Zieschang of UBS.

Please go ahead sir.

Morning.

You've mentioned that actually you were about to reallocate some resources within the investment bank.

Could you just comment in terms of what areas you perceive to show the highest structured growth rates going forward?

Because obviously structured credit, you probably had a profit contribution of 25% to the Group, somewhat -- in terms of growth engine somewhat questioned.

So about your future growth pocket within the investment bank, that would be great if you could just comment on that?

Thanks.

Thank you Philipp.

We're still looking at things and I think it's premature to make -- certainly I shouldn't make that announcement here.

But we're studying where we're allocating capital, the returns we're making on the capital, what the markets are telling us and where opportunities are.

We're a global firm.

We're interested in expanding our global platform and we're interested in renewing our product array and those are the principles underlying this review.

And it's something we do all the time.

If we weren't doing it now after the third quarter we would obviously be remiss.

But I think it's premature Philipp, but you'll see in future quarters where those changes are.

Thanks.

You're welcome.

The next question is from Mr.

Jon Peace of Lehman Brothers.

Please go ahead sir.

Good morning.

I had a question on capital management.

We heard from UBS yesterday that Basel II was going to cost them maybe around 50 basis points.

But I just wondered what your current thinking was with respect to Basel II?

And in that context, you've obviously given as a plan to raise your dividend payout.

With Basel II on the horizon and after a tough year do we still expect that -- the payout to rise from the current mid-30s in 2007?

Or is it going to take a little bit longer to reach the goal of a 50% payout?

Thanks.

Jon, as far as Basel II -- and we're still working through this and we're still working with the regulators in terms of model approval.

So we're not ready, although I think we have given numbers in the past.

We expect, based on our current risk profile and expectation, that we will apply the advanced approach which we're hopeful of and we're working towards that.

There's nothing to indicate that we won't.

We see our Tier 1 ratio being somewhere over nine, maybe as far as the mid-nines.

So if you use nine to nine plus -- nine point -- point -- nine point plus, I think you'd probably have a good sense.

But again I don't want to state a number that we're not comfortable on the footing.

As far as the dividend is concerned, we have already accrued or set aside as part of our Tier 1 capital, it's not an accounting accrual but it's a calculation accrual, a dividend of approximately EUR4.12.

So our Tier 1 ratio is based on a capital that at 37% of our net income assumes or as a charge in there for a dividend equivalent of EUR4.12.

That compares to EUR4.00 for last year.

The ultimate decision on dividends is a recommendation by the Supervisory Board to the Annual General Meeting so I would not assume or presume to state what it's going to be.

We have our goal to 50%.

We will work towards that goal but obviously we would also have to reflect our capital management, our opportunities for growth as well and what our earnings potential is.

But we're very encouraged by where we are, the dividend has come up significantly.

That's where we are.

Great.

Thanks.

You're welcome.

The next question is from Mr.

Stuart Graham of Merrill Lynch International.

Please go ahead sir.

Hi.

Firstly thanks for the extra disclosure.

That's very useful.

I just wanted to ask on the CDO exposure which you said you managed down from EUR10b to EUR1b.

Could you give me some color on how you achieved that which is obviously a very good performance over Q3, please?

Stuart, a lot of that came -- and none of it was moved and you haven't implied that but none of it was moved out of trading into other categories of the balance sheet.

So in case anyone has any thoughts of that.

It came from sales and closing down those derivative positions.

And so it was just taking down our risk.

So these were genuine sales?

It wasn't that you were hedging positions, you actually managed to sell these positions down?

That's correct.

Yes.

We took down some strategies more than others considerably, but that's correct.

In that context the EUR465m hit you talked on correlation trading seems quite low.

EUR465 on shifting EUR9b is only like a 5% haircut and I wouldn't have thought that people would have been buying these assets at only a 5% haircut in Q3.

Or am I missing something?

A lot of -- in fact some of the confidence we have in our marks is based on the fact that we did see realization on sales or closing down derivative positions.

So we were able to use that experience to look at our verification.

I don't want to start talking about individual trades and certainly I don't have in front of me all the positions so whether there has been some additional hedging, but what I do know in some of the positions is that we genuinely took down through sales.

Okay.

Can I just squeeze one question in on -- generally in structured finance, your exposure to U.S.

monolines, if you could just comment on how big that is?

Is that a significant issue for you outside of the CDO space, more generally in your structured finance business?

I don't think we want to talk about the individual or specific exposures.

We monitor them carefully.

I think in the aggregate they're not, relative to the size of our loan book or even our -- some of these our derivative positions to our trading assets are not significant.

But we are monitoring what's happening in that sector very carefully.

If things do change we certainly will react in terms of both protecting our risk, as well as what we record in the books.

But the total exposure is not significant or material relative to our overall exposure.

Great.

Thanks for the disclosure.

Thank you.

Thanks Stuart.

Next please.

The next question is from Mr.

Kian Abouhossein of JP Morgan.

Please go ahead sir.

Yes, hi.

I have a question regarding your balance sheet.

It's the first time that we're seeing over eight quarters you're actually reducing your total assets.

And I was wondering if this is a trend that will continue within the Group considering your funding costs on inter-bank and term that has gone up significantly?

And in addition, I'm just trying to understand if you are thinking about reducing your financial assets at fair value which are materially higher even on a U.S.

GAAP adjusted basis to your peers?

Do you see any change in your overall balance sheet asset size over the next year or so?

Kian, I would not say that we don't reflect on the absolute size of the balance sheet but our principal focus is on risk and so risk-weighted assets are how we manage the balance sheet size.

Certainly we do look at absolute balance sheet.

I would not read anything -- we've taken down some risk, as we talked about in this call, but I would not see any strategic move or strategic implication from whether or not the trend is up or down.

As far as financial assets at fair value, fair value has a discipline and requires a discipline.

Now that's not the question you asked.

So we're not troubled at all that a good part of our balance sheet is in fair value because each morning we wake up and we find out what happened the day before and we're able to test those marks on a regular basis and so understanding where we are and what risks we have is very important.

If your question is are -- is our risk appetite reduced and are we going to take down our risk positions?

I think we see opportunities in the markets and if -- as we see opportunities and we think a well-capitalized bank that has good funding sources and stable sources of funding is in a very strong position to take advantage of opportunities as they come up.

So we certainly will look at risk prudently.

I'm just looking at the balance sheet size and I draw your attention to one category that maybe is driving or is creating some volatility in the effect and that's other assets and other liabilities.

And in fact our balance sheet is going up instead of down.

But maybe you were talking about financial assets.

I don't know which, because the balance sheet is going up.

It's down from the second quarter but if you look at where that --

From the second quarter, that's what I mean.

(Inaudible) growing fourth quarter.

If you look, other assets -- financial assets are down marginally.

Yes.

Other assets are down from EUR252b to EUR215b.

The biggest item in there is trade-based settlement date receivables.

So -- and that's going to move the same thing by the way on other liabilities.

It's trade-based settlement date liabilities.

So depending on trading activity, depending on where settlements are and periods -- settlement periods, that number is going to go up and down.

I hope that answers your question.

And if I may follow up on that?

Is there any drive by local regulators to look more at leverage ratios rather than just Tier 1?

Do you get any demand from local regulator to look at that ratio a bit more?

We have not heard of one.

We don't know of any, Kian.

They might be thinking about it.

But it's the risk inherent because if someone had a very large book of gilts and bunds and U.S.

governments and someone else had a small balance sheet and higher gearing ratio -- lower ratio gearing but -- better gearing ratio, I'm sorry, higher gearing ratio or capital ratio, I don't know what that would tell you.

I think you've got to look at the risk and as far as we know that's what the regulators are focused on.

Good.

Thanks.

Next please?

The next question is from Mr.

Joachim Muller of Cheuvreux.

Please go ahead sir.

Yes.

It's Joachim Muller.

Just a technical question on your leverage finance book.

The EUR40b that you have in your trading book, at what stage -- let's assume it will be difficult to sell down most of that book -- at what stage would they become hedge maturity and you would have to reclassify them?

And what kind of impact would that have on your risk-weighted assets weighting and Tier 1 impact?

Maybe you can comment on that a bit.

Yes.

Joachim, once we've classified them as trading they will stay in trading.

So the commitments are in trading.

We've looked at, as I said earlier, where the intent was.

Based on that intent we have classified them.

If they are classified as trading under IFRS we don't have the latitude of even changing them unless that was a mistake, the classification.

Under U.S.

GAAP there may be some latitude.

So we will not change those.

Even if there was no possibility because of the market conditions to sell them?

We would still have to keep them in trading as far as we understand and they would still be mark to market.

Now, as far as regulatory capital is concerned, they could stay in the trading book as trading assets I believe for 180 days from the time that they're funded.

After that 180 days they would be classified for regulatory purposes as banking book assets and therefore take a higher capital charge.

So in terms of balance sheet -- reported balance sheet, there won't be a change.

As far as regulatory treatment, if they're here for longer than 180 days there will be a change.

Okay.

Thank you.

You're welcome.

The next question is from Luca Orsini of One Investments.

Please go ahead.

Luca Orsini, please go ahead and ask your question.

Probably gone.

Shall we move on?

The next question is from Mr.

Carsten Werle of Oppenheim Research.

Please go ahead sir.

Yes.

Carsten Werle, Oppenheim.

Good morning.

In the October performance update that you gave you provided us with a number of EUR32b for Deustche Bank-sponsored ABCP conduits.

Is this number still correct and am I right to assume that the major part of this EUR32b is on your balance sheet, not off balance sheet?

And perhaps for those parts which are off balance sheet you could still give us some indication which is dollar denominated assets and what's in euros.

Yes.

The EUR32b was the number at September 30.

The latest report I received would indicate that that number if it has moved has not moved materially.

So assume it's still EUR32b.

Of that EUR27b is consolidated on our balance sheet and if you look at the interim report, it's included in a category called -- it's Available for Sale.

And part of it is in Available for Sale and part of it is in Loans.

So the Loan portion of that is about EUR15b.

The Available for Sale portion is approximately EUR11b so -- there's some rounding there but that's the EUR27b.

Five is not on our balance sheet.

The five is in -- is neither in dollars or in euros.

I believe it's in Australian dollars.

Probably, it's in Australia.

And the reason we don't consolidate it is that under the accounting rules we have no direct exposure, the assets would revert to the seller upon default.

We should talk about why we have these sponsored conduits.

The intent of these is to provide access to the commercial paper market to customers who generate loans of their own.

And these are normally commercial companies, but it could be some financial companies, who want access to the commercial paper markets.

And as part of our business we provide them that access.

But because of the terms of the agreement we need to consolidate them.

So the number of EUR32b is there and I hope the numbers I've given you have helped you.

Yes.

Many thanks.

You're welcome.

Thanks Carsten.

The next question is from Mr.

Stefan Stalmann of Dresdner Kleinwort.

Please go ahead sir.

Yes.

Good morning everyone.

I have one question please regarding the development of your risk-weighted assets and in particular the fact that it does not seem to show any sign of growing counter-party risks from your Derivative book.

I'm actually quite puzzled to see that your Derivative marks during the quarter have hardly risen despite the substantial jump in volatilities across the board.

Could you explain why the Derivative marks on mark to market values have hardly risen and why there has been no reflection of possibly rising counter-party risks on your Derivative book in your risk-weighted assets?

Has there been any change in the way that you account for these positions or how you measure the risk weighting coming out of it?

Thank you very much.

Yes.

Stefan, there has been no change in the way we account for Derivatives and the marks are falling through as they have, depending on levels, from quarter to quarter.

The risk-weighted assets went up just about EUR3.5b and if you are interested in the breakdown of that I can give it to you.

And there was an FX benefit.

Derivative component is up about double that, so somewhere in the EUR7b range.

The Derivative component of risk-weighted assets.

Loans were down, undrawn commitments are about flat.

Other commitments are up by about EUR4.5b, EUR4.4b and the FX had about just over EUR6b positive so it reduced the risk-weighted assets.

So if you were to look at it, the FX benefit from the weakening dollar for example pretty much offset the increase in the derivatives.

And so what was left came from other assets and liabilities including contingent assets and other securities and assets.

Okay, Stefan?

Yes.

Thank you.

Ladies and gentlemen, in the interests of time I suggest we take three more attendees with questions.

The next question is from Mr.

Georg Kanders of WestLB.

Please go ahead sir.

You have announced some restructuring.

Do we have to assume that there will be a significant restructuring cost in Q4?

You say we've announced restructuring, this was in the U.S., one business MortgageIT we had some restructuring.

We're not anticipating any restructuring program.

We're still looking at plans as to refocusing but at this point we're not anticipating, we're not planning a restructuring.

But plans aren't done yet and that doesn't preclude that there won't be, but at the current time and -- we don't anticipate.

Georg, I think it's important to say, we said it in the (inaudible) as well that we may make some adjustments in order to refocus some resources.

We haven't mentioned restructuring and therefore we don't mention restructuring costs.

Okay.

Okay.

Thank you.

Thanks Georg.

Next please?

The next question is from Mrs.

Anke Reingen of Execution.

Please go ahead ma'am.

Yes.

Anke Reingen, Execution.

Just one question on the dilute number of shares.

We have seen ongoing decline.

Is this a trend we should expect to continue and is this actually a real decline in the number of diluted shares?

Or will we see those shares basically working back to higher levels at some point?

Thank you.

I don't think I'd Anke view that as a trend.

There's some technical issues for the reduction.

One of those has to do with the restructuring of some hedges on shares with regard to the REU program.

And then other parts are just due to both the exercise of options by our employees which moves from diluted to --.

If you look at the shares issued in the third quarter went up and part of that is just a shift.

So there is no trend I'd read into that.

Thank you.

Next please.

The next question is from Mr.

Kinner Lakhani of ABN Amro.

Please go ahead sir.

Yes.

Hi.

Good morning.

I just wanted to focus on the 2008 target, particularly in relation to Corporate Banking and Securities.

You do talk about confirming your target subject to normal conditions.

So my question is what is normal conditions for the fixed income or the debt sales on trading revenues?

Are you thinking more 2006, '05, '04?

And how do you contextualize this, particularly with regard to the intellectual capital businesses where Deutsche Bank is overweight but where in certain areas it's likely that activity will take a long time to come back to recent levels?

Again Kinner, I don't know that I'm qualified to state but let me tell you what I think normal market conditions are.

And I don't think I'd go back and look at any one period because what is normal might be different in the future.

I would look at two issues.

The principal issue is liquidity.

And so for conditions to be normal there has to be liquidity, meaning from investors, buyers, that returns to the market.

And we're beginning to see some signs of that, although it is early.

And I think we would want more time and want to see that develop further before declaring victory on that regard.

The second is volatility.

Now volatility in a way helps us but if things perform in a more orderly way that would also help us.

So it's when the market has the feeling that risk is appropriately priced, when that happens.

And as I said, because liquidity is returning, at least there's some indications, that certainly could be interpreted as people believing prices are reflecting risk reward.

And we would see it where there's neither a boom or a bust.

So -- maybe that doesn't answer your question but as I said at the beginning I don't know that I could -- or am qualified to define that and it may be different tomorrow from where it was yesterday.

Kinner?

Thank you.

Thanks.

With that we would like to close our call over one and a half hours into the call.

Thanks everybody.

If we might have cut somebody short please come back to the Investor Relations team.

We are more than happy to answer any questions.

Thank you very much.

Thank you.

Goodbye.