Deutsche Bank AG (DB) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the second quarter 2009 Analysts' Conference Call.

Please note that for the duration of the presentation, all participants will be in listen-only mode and the conference is being recorded.

After the presentation, there will be an opportunity to ask questions.

(Operator Instructions).

At this time I would like to turn the conference over to Dr.

Gurdon Wattles.

Please go ahead, sir.

Thank you, Maria, and welcome ladies and gentlemen from us here at Deutsche Bank in Frankfurt to the Deutsche Bank second quarter results call.

This morning, we published our second quarter earnings release, our interim report, our financial data supplement and our PowerPoint presentation.

And I draw your attention also to the cautionary statement at the end of that last document.

Our Chief Financial Officer, Stefan Krause, is going to go over some of the charts in the PowerPoint document and then we will hand over to question and answers from you.

We hope to get to as many questions of yours as we can, and if we don't, then please contact the investor relations team and we will get an answer to you.

With that, I'd like to hand over to Stefan Krause.

Stefan.

Thank you, Gurdon, and welcome from my side as well.

Ladies and gentleman, let's quickly go over a couple of slides and then, and then obviously, I will gladly answer your questions.

I will start with the highlights of Q2.

We have revenues of EUR7.9b.

We had to absorb a provision for credit losses of EUR1b in which detail we will cover later.

Income before taxes was at EUR1.3b, net income of EUR1.1b.

Our pre-tax return on equity was 16%.

Very good, our capital position and balance sheet objectives we have been able to further work on them.

Our Tier 1 ratio is now at 11%.

We have reduced risk weighted assets significantly and we continued to reduce our balance sheet.

In fact our IFRS assets are down 18%.

Our US GAAP pro forma assets are down 6% to EUR928b.

Our leverage ratio, therefore, is with 24 ahead of target, which we will not change.

Level 3 assets are down 20% to EUR64b both on de-risking and balance sheet reductions, as well as improved market conditions and very important to note that this meant that our loan volume to German midcap clients is stable at EUR21b.

So we do continue to lend in the German market.

Next, to our strong capital position.

We have said that our liquidity and funding position is important to us.

We continue to have cash and liquidity reserves significantly exceeding our short-term wholesale funding and we have completed more than 80% of our funding plan on the both sides of the capital market issue and deposit raising for '09.

If I go to the results in summary, revenues of EUR7.9b, as mentioned, and income before income tax of EUR1.3b.

And we achieved these results absorbing about EUR600m of negative effects that I will show you in detail.

That puts us in the half year at a EUR3.1b pre-tax and a good EUR2.3b after tax result, well in line with our plan.

The revenue, on next page include positive effects of EUR758m, EUR392m arising from a hedging of our restricted equity unit related to our employee compensation.

We had a gain of EUR334m from derivatives related to Deutsche Postbank AG shares and EUR132M arising from sale of industrial holdings.

I will refer to these in more detail later.

But these effects were partially counter-balanced by an impairment on assets in our asset management alternative business of EUR110m and we had only net markdowns of EUR11m.

Certainly, the lowest figure we have seen in a while in a quarter.

On the provision for credit losses, I am sure you have seen the significant rise to EUR1b in the second quarter.

Thereof EUR508m were driven by IAS39 reclassified assets and EUR433m were related to two specific counterparties, so they are non-recurring but occurred in this quarter.

So a large part of the results we had to take were specific results with two counterparties.

In the previous quarter, we only had EUR187m related to these specific two counterparties.

Therefore we have decided to give you an update of the composition of our loan book on the following page, and go a little bit more detail because I am sure there were some questions around the current issues around loan loss provisioning.

This chart demonstrates, in principle, the composition of our loan book and the provisions we built throughout the quarter.

And the provisioning ratio that we show on the chart basically confirms our view of the risk in the different buckets.

You see the low risk bucket has 34 basis points, the moderate risk 99 basis points, and then the high risk shows a mathematical number of 797, sorry 667, but it's obviously driven by these two relationships I referred to and is certainly not affected on an ongoing basis.

And that's why our high risk bucket, as you see, will always be determined by one-offs in case there further ones occur that, you don't necessarily see at this point in time.

You will see when you look at the buckets that were affected, PBC mortgages show a high credit quality and a loan to value of about 70% right now.

Our loan to value is based on very conservative valuation methods and typically substantially below market valuation.

That is why we believe that this German mortgage portfolio is quite stable.

In the investment grade German mid-cap financing our exposure is hedged to a large extent.

29% of this portfolio is hedged, predominantly via CLOs and the investment grade book even has 67% hedging via single name CDS, so we feel that that book is very well protected.

Where we have some issues definitely is in the small portfolio consumer finance that we have, and most of that occurred outside of Germany.

I think we have alluded to this risk in previous conferences.

In the CI portfolio, it's the commitment of people -- real estate that we include there that obviously we are monitoring very closely and as I alluded to again in the leveraged finance asset includes these two specific risks that caused a significant additional reserve in the quarter.

On our commercial real estate, the split between US and non-US is EUR6b versus EUR8b non-US.

So I think we continue to feel comfortable and if you will know from the notes we have done, some further de-risking in that portfolio as well.

So overall, obviously an area of our business that we closely monitor, looking at the general deteriorating credit environment but based on the structure of our book, we continue to feel, comfortable despite the fact that clearly we see rising loan loss provisions.

Non-interest expenses on page 8 were EUR5.6b in the quarter.

Significantly impacted by specific charges that you could also see in our release of EUR831m.

Compensation costs were driven by higher accruals for compensation and, of course, of severance payments of EUR321m.

Our compensation rate -- ratio, adjusted for severance payments was 36%.

This obviously is impacted by several non-bonusable revenues that we had in our revenue line that's why this number may appear low.

General and administrative expenses included a EUR316m charge from the legal settlement with Huntsman, as well as one-time exit costs related to our facilities that we don't need any more because of our efficiency improvement measures.

Our non-compensation expenses also include an impairment charge of EUR151m resulting from the bank's involvement into a [court] asset.

On page nine, we have tried to help you to make an assessment of the underlying trends of our current profitability and business developing.

The quarter has -- significantly impacted by a whole series of one-offs and within this category we have really only used those items that have clearly a one-off character and are not recurring, are specific, and are not recurring effects.

So you see that on the one hand, based on the hedging and our equity, our Postbank gain and our industrial holding sales, the quarterly profits was positively impacted by EUR758m.

And then we had a lot of additional charges, one-off type charges, the Huntsman, Maher, the RREEF impairments and these provisions related to specific transactions that caused our profit to have a negative of EUR1.4, almost EUR1.4b.

So on a net basis, taking positive and negative one-offs, our profits had a charge of about EUR600m.

As I alluded to at the highlights presentation, we had a EUR1.3b income before taxes and are well underway in terms of achieving our target this year, from an internal view.

Our ETR on page 11 is relatively low in Q2.

I am sure you have noticed and mainly driven by non-taxable gains.

Obviously, for example, the Postbank put/call structure and equity pickup, the sale of industrial holdings, as well as the equity (inaudible) hedges impact our non-taxable items and they lead to this reduced charge.

For the full year, we are currently expecting an ETR below 30% but our midterm guidance remains at the 30% to 35%.

Very good news on the capital side, with our Tier 1 ratio now being at 11% that we, as you see, achieved on both sides of the equation, the improved profit of the group on the one hand and on the other hand, the significant reduction in risk weighted assets.

We had significant movement in the risk weighted assets.

On the one hand, we did have to absorb a multiplier increase that was getting from the BaFin of about EUR6b.

We also had, obviously, a negative on our risk weighted assets based on rating downgrades by about EUR6b.

But these two effects were compensated by movements in market parameters in our derivatives, by our impairments taking through our P&L that then meant that we had to carry lower risk weighted assets for these positions.

Also by specific process improvements as we did, especially also improved vetting but also improved the collateral recognition.

And then, of course, as you saw on the balance sheet, in our general business development, significant risk reduction that then more than compensation the additional charges we had in the risk weighted assets.

To move on to the total assets.

As you know, we have been very committed to a risk reduction and balance sheet reduction with another quarter of significant reduction of our balance sheet.

Our total assets, per June 30, were EUR1.1 trillion according to IFRS, significantly driven by lower derivatives, due to obviously the non-credit spread movement but also our US GAAP pro forma definition our assets were EUR928b, a decrease of EUR54b or 6%.

Since June 30, 2008, therefore, our US balance sheet is down by one-third.

I think that is really a significant reduction of risk for the Bank.

Also in line then, our leverage ratio decreased to 24%, ahead of our target.

But I clearly want to restate this here, that we will not change our prime target.

We still think that 25% leverage ratio is appropriate for our business market.

One strength of Deutsche Bank, next to its strength and capital position, continues to be our funding and liquidity position.

On page 14, we show how our funding position looks right now.

EUR479b of which 14% are short term wholesale funding but however, this position is completely covered by cash positions in -- on the balance sheet.

The good news is that our funding plan is widely completed, as we show on page 15 and we always get the questions how we are doing in terms of our pricing and issuance, so we have prepared this for you, which I think has got reference to how we are doing, how Deutsche Bank credit is seen in that we are able to secure long term debt.

As you see, our issuance is at happening at low cost, comparatively low cost.

Obviously, that we have basically completed both on our deposit and in our capital market issuing about 80% of our funding plan and that obviously with the issuance in the quarter of the Pfandbrief it has really helped us also to diversify our funding base further, so we continue to believe that a very strong liquidity and funding position.

Let me quickly cover our segments.

Sales and Trading Revenues on page 17.

At EUR3.5b after about EUR108m in net markdowns and [EUR130m] of fair value losses on debt, our first half-year revenues of EUR7.5b show EUR1.1b of markdowns and about EUR140b of fair value losses on debt.

Though after the announced recalibration of our business model that we have announced as our new strategy, our most liquid flow products account for 45% of this revenue's drop.

Our medium, highly liquid are 54% and our highly-liquid position that we strategically, wanted to significantly reduce, only accounted for about 1%.

In looking at our market, we have market share gains in many of our revenue categories and many of businesses, so we continue to benefit from Deutsche Bank's strong brand.

In -- on page 18, we showed some main developments that occurred during the months.

We start, obviously, with our constant input VaR, which is an approximation of how the value at risk would have developed if market movements are neglected.

You see how substantially down our value at risk is is a proof that at the same while reducing our balance sheet and value at risk is also able to take down our risk as a whole.

We show you the US basis risk, which in a quarter-to-quarter comparison is down 44, 42% and as compared to the peak is even more significantly down.

Global Markets US GAAP pro forma balance sheet down in a quarter-to-quarter comparison 7%.

It was down in the first quarter 43% versus the peak.

I think I've alluded to that and the same, you see, our restructuring efforts continued at a slower pace with reduction of 1% on the non-contract costs.

Moving onto the revenues in Sales and Trading debt and other products.

Here you see a slowdown that we had versus a very good Q1.

That will affect -- play here a significant role -- risk.

We have an excellent Q1 result and you know that we have decided to go with further de-risking and balance sheet reduction exercise which has had an impact, obviously, on this business and later on, when we go into the Level 3 assets, as we have also worked on reducing our Level 3 is that these are the main factors impacting the performance in the Sales and Trading debt area of the business.

On the Sales and Trading equity revenues, we have had [events] for six quarters now.

Even after EUR113m of them were fair values losses on own debt.

As we've told you basically in the first quarter, this was the area where we suffered most of our losses in the prop trading area.

We then went into the first quarter with restructuring and are happy to report that we recovered so quickly in the second quarter already.

Our legacy positions are largely de-risked in the equity derivatives position.

Our cash equities both in Europe and the Americas, we continue to gain market share and to develop nicely especially in the US by gaining market share.

Our prime brokerage again is the strength of the Bank, we continue to exhibit strength as shown.

We were top-rated prime broker in the Global Custodian Survey of prime customers.

We move on now to Origination and Advisory, as you know, a significantly down market, low market volume but we have been able to capture a larger market share.

In the M&A we have a global position number five and in the EMEA we have number one position right now.

But, of course, that based on the low volumes of the market.

We expect though to be able to capitalize on our market position as the environment improves in these businesses.

Going to our Global Transaction Banking Business, as you know GTB generated a pre-tax profit of EUR101m.

The business continues to be exposed to the low interest rate environment as well as to significant incremental regulatory charges for deposit protection.

In Germany, that is approximately about EUR50m of a charge.

This negative effect is partly counterbalanced by a benefit of EUR55m from our redefined risk-based funding methodology, which I will go in later in my presentation.

So basically, the main developments in this business area, we have higher non-interest expenses of EUR82m that -- well, related to the fact that we have higher comp and benefits driven by higher staffing levels as we continue to invest into this business.

We believe we can benefit from it and from the known strength in the future.

We also had higher non-compensation direct costs, mainly driven by these regulatory charges that we had to deal with.

If we move on to our Brokerage and Portfolio fund management revenue, you will see that we are somewhat stable in the quarter-to-quarter comparison with EUR857m revenue.

We have shown that obviously markets continue to down.

We saw a little recovery in the quarter, so we see some customers coming back to activities which obviously then benefits our activity and asset and wealth management business.

Still, client activity continues to be significantly depressed.

If we go into the Asset and Wealth Management business specifically, obviously in the quarter we took RREEF impairments of EUR110m related to different assets.

And as we have said also, specially restructured the asset management side of this business and we are working to improve its efficiency in order to achieve the target that we set for recovery in the second half, which was additional severance charges of EUR54m in this area.

Our Private and Business Clients generated a pre-tax profit of EUR55m.

The profitability was obviously impacted by severance charges of about EUR150m, a significant impact.

So but now obviously in this business, as we are restructuring as well, that the significance bulk of the severance is now behind us with very modest severance forecast for the rest of the year, of only approximately EUR50m.

The additional results were obviously impacted by the pension and deposit insurance costs that are rising in Germany that increased the cost base by about EUR15m.

Obviously, this business area is impacted by the credit loss situation.

We saw some stabilization of the credit cast, at least the worsening stopped in this business area.

We continue to benefit from some revised parameters to the model assumption on how we do our reserve policy, which in the quarter-to-quarter comparison showed about an improvement of EUR30m.

We have identified certain sub-critical portfolios predominantly outside of Germany, where management has now taken rigorous action and we expect some benefit of that action in the coming quarters.

To some extent, obviously clients continue to or have started to shift deposits into securities, as we showed in the previous chart, showing some first indication of customers returning to the market, but overall client activity remained weak, which then puts pressure on the profit of GTB.

Let me now go now into a couple of key current issues.

Obviously, on the first hand we highlight again the issue of the problem around -- the whole situation around the credit environment we are facing right now.

Problem loans rose by EUR3.7b in the first half of 2009.

This increase includes EUR2b in relation of IAS 39 reclassified assets principle in relation to these two specific counterparties I already discusses in the context of the loan loss provision development for the current quarter.

The remaining EUR1.7b increase reflects the general weaker credit environment with EUR1.2b relating to our corporate lending to US and continental European customers.

Lastly, about EUR500m relates to our collectively assessed loans, principally obviously the PBC loans in Germany, Spain and Italy.

The IAS 39 reclassified assets are also the primary driver behind the 7 point drop in the IFRS impaired loan coverage over the last six months.

These efforts obviously carry on average significantly lower allowances of around 28%.

However, this lower ratio has to be seen in light of the markdown already taken at the time of reclassification.

I would like to remind you that obviously when we reclassify these assets we reclassify them at their current market valuation which has to be taken into account when we look at the risk coverage ratio.

Also, let me remind you that our IFRS impaired loans are often collateralized and that, including this collateral, our coverage at the end of the second quarter was 76%.

Let's now go onto the topic of the monoline exposure that obviously continues to concern the market.

We are very aware of it and therefore we always like to highlight what the averaging effect of our assets and good exposures does to the overall ratio and why, in the areas in which we believe our risk, we are well covered.

This is what this chart shows.

Let us cover the US RMBS.

A summary of our monoline policy as it relates to super senior and other subprime and Alt-A shoes this first category provisioning ratio on non-investment grade monolines increased from 76% in Q1 to 82% in Q2.

While the ratio on AA rated monolines remained flat at 9%.

So we have increased -- in the high-risk position, we have increased our reserves.

During the second quarter, our exposure decreased EUR366m, driven mainly also by foreign exchange movement and a decrease in the AA rated exposure driven by an improvement in the market value of the underlying assets, predominantly in the Alt-A area and the Radian unwind.

Majority of our exposure is to AA rated counterparties as you can see in the chart with Alt-A underlying -- dominating this exposure.

So the quality of the majority of the portfolio remains high, with very good subordination level.

Our remaining gross exposure to ABS, CDO and subprime assets is now relatively small and, as you can see on the chart, it is all highly provisioned.

If I go into the other exposures, the lower part of the chart, if that would mean all the other then non-US RMBS asset classes, provision ratio on the non-investment grade monolines increased from 32% in Q1 to 38% in Q2, while the ratio on the better rated AA rated monolines remained flat at 9%.

The overall decrease in exposure from EUR6b to EUR4.9b during Q2 reflects an improvement of the market value across all these assets classes on the one hand and to a lesser extent, obviously some exchange rate movements.

So these positions are protected to cover a broad range of obviously, generally, high quality asset classes.

That's why we like to show them separately because they have a different risk with high levels -- strong levels of subordination relative to the current and expected default rate on these assets.

So we continue to believe, in summary, that overall in Q2 our monoline exposure was reduced by EUR1.4b by improved market values and effects as I've told you and the unwind of Radian.

While, our CVA reduced reserve looked at in comparison, and it's really only the averaging effect that make our general monoline exposures versus our competitors, look lower.

But we continue to be very comfortable with our monoline exposure.

On page 29, another good news out of the quarter that obviously our Level 3 assets have been significantly reduced.

EUR10b of these reductions are in derivative market value, due to the credit spread movements we saw in the quarter.

EUR4.5b were reductions based on sales and unwinds and EUR1.5b we had a net transfer out of Level 3 which obviously is related to the increased pricing visibility in the market, based on the improved market condition.

So, overall, a good development.

I would like to refer back to our credit trading activities.

Obviously the asset reduction here in the Level 3 had some impact on that performance.

If we go to the impact of IAS 39 reclassifications that we show on Page 30.

The first information is that we had no further reclassifications from trading loss during the quarter.

In the second quarter, we have seen an over-reduction from EUR6.7b to EUR6.1b in the ongoing difference between the fair value and carrying value of the asset that we reclassified.

This has been driven partly by an improvement of the fair value of some of the underlying assets together with redemptions and maturities of assets where the carrying value previously exceeded fair value.

Redemptions and maturities have typically been at or above carrying value which is very important to us.

The reduction of carrying to fair value difference is not been more significant to date due to the structured nature of many of these reclassified assets which have not thus far seen the spread reduction seen more generally in the credit market, so that's the main reason why we haven't seen significant market value improvements.

In addition, the steepening of the yield curve in the quarter will have had a negative impact in the fair value of longer dated reclassified assets, where the interest rate impact is generally hedged and the relevant hedge is subject to hedge accounting treatment.

So the overall carrying value of the portfolio has been reduced by some EUR2.3b driven by redemption and maturities, FX movements and the increased loan loss provisions recorded in the quarter, as I discussed earlier.

Let me now move to page 31, also as a clarification for you to understand the profit quality in Q2.

We have segregated now the impact of the Postbank transaction on our results.

The impact from the revised structure was in the quarter EUR234m, for the half year EUR476.

That is also the impact that we reclassified as a one-off in the earlier statement.

And then, obviously, we have the ongoing recurrent impact coming both from the put/call structure and the equity pick up, impacted at EUR155 -- or at EUR150m in the quarter and the numbers shown in the chart show a total of second quarter impact of Postbank of EUR389m and approximately EUR860m for the first half year.

On page 32, I cover quickly the issue of risk-based funding.

What motivated us to change our risk based funding, basically two main effects.

One the one hand, we did want to charge our funding costs based more on the risk of the assets that are funded, and second, obviously we wanted to reward the stickiness of the deposit, of some level of deposit.

And therefore, we did some adjustment of transfer pricing.

This is neutral for the group as a whole and in the chart we show you which ones of the business segments benefited from this change and transfer.

Obviously, throughout the crisis we have seen the importance of deposit funding and we are recognizing this benefit with this new classification.

On page 33, I therefore summarize the half year comparison.

As you can see, we have a much stronger revenue momentum versus last year.

We are considerably more profitable, and despite the fact that we are digesting a higher loan loss provision, our Tier 1 capital ratio is the best that it's ever been, and I went into the effects in our balance sheet.

It's down by a third, if I take the US GAAP pro forma analysis as a base.

And last, but not least, not on the chart, we continue to show funding strength.

So with that I conclude, and I look forward to all of your questions.

Thank you very much.

Thank you sir.

(Operator Instructions).

The first question is from Jon Peace, Nomura.

Please go ahead.

Yes, good morning.

I wonder if you could just maybe elaborate a little bit on your expectations for credit quality.

I think that break-out into the buckets is very helpful.

But of those three low, moderate and high risk categories, could you maybe give us an idea of what you think the peak non-performing loans or the peak charge-offs might be?

And the second question I had was just on the dividend.

Could you tell us what level you're accruing at, and how should we think about the target for dividend, in absolute terms or in payout terms?

Thanks very much.

They are two good questions.

Let me answer the easier one first, that's the dividend question.

We always have a system to accrue to previous year's dividend until we get a new decision - that is the decision that the Supervisory Board in the German government structure takes.

So we are accruing to our EUR0.50 that we used -- that we paid out last year on dividends.

On our credit quality expectations, on the three buckets, you see most of these portfolios are performing good.

That's why we're -- on the low bucket we don't expect any further surprises.

The moderate is impacted by our consumer finance portfolio, which is -- especially the consumer finance portfolio outside of Germany, which is not a big portfolio.

We have taken some management action, some management decisions, and we think that both on the collection side in Germany as well as on the risk side in these (inaudible), we should be fine.

So therefore we don't expect -- As I said, we saw some leveling off on that one.

The high risk bucket is dominated, obviously, by this reclassified leverage position, and these are one-time event driven credit losses, so to do a run rate projection on those is difficult.

We -- of course, based on our results, if we would have seen any further risk coming, we would have had to make provisions.

At this point we don't see any, but as the environment changes in a positive or negative, this may -- this bucket may be impacted, but will be more driven by one-off situations.

We hesitate, obviously, a little bit to make a more detailed forecast, and even to give you a number, because obviously it's very difficult in the current environment with the uncertainty coming at us at the second half to deal with it.

The good news, only one of the exposures that some other banks have reported issues with, which is the German mid-cap portfolio, we have this additional hedging feature, so we are protected in that sense, additionally.

So that's why, overall, with the low and medium risk bucket, we feel comfortable.

Okay, thank you.

The next question is from Jernej Omahen, Goldman Sachs.

Please go ahead.

Hi there, it's Jernej here from Goldman.

Essentially just three questions.

The first one is, when you went through slide 20, I think you made a comment that there was a reversal of gain on own debt of around EUR113m, which is not a big number.

But from memory I seem to recall that Deutsche Bank stated on the Q1 and Q4 results calls that you are one of the few investment banks that doesn't mark-to-market your own that, and it's quite possible I got that wrong.

But please can you just update us on that, if that's the case or not?

Then the second question is, on slide 30 you made a comment that redemptions that come through are done at or above fair value, i.e.

at or above where they were entered into the, essentially, accrual books.

And I was just wondering where -- if a redemption is clearly done above fair value, where does the write back come through?

And given the amount of reduction of this portfolio, where do we see it in the P&L, i.e.

the combined effect of these redemptions being done, at what seems to be favorable levels?

And the last question I think is relatively straightforward, it's on page 7.

And I think what would be very useful here is the following.

When you give us the three buckets, I think rather than asking what your peak NPL estimates are, I would like to ask what your current NPL ratios are for these buckets?

And then I think the logical follow-on question would be the coverage ratios as well.

And the reason why I'm asking this question is not to be excessively detailed, but because you report a coverage ratio around the 40% mark for the Group, so I was just wondering how that splits between the higher, lower and moderate risk NPLs?

I am assuming that -- by implication one would then assume that the lower risk NPLs, or the NPLs in the lower risk bucket would have coverage of half of that of the Group, I would imagine.

Thank you.

Jernej, thank you for your questions.

Let me go on the fair value, number one.

Yes, we don't generally do the fair value on that.

There is very small provisions that we fair value.

Our position always has been that there is no true economic value in that, and that's why we stayed out of it.

The amount for Deutsche Bank would have been substantial, in the billions, if we would have done it.

So we only had a very small, and obviously also on the small effect we see some reversal, and that's the one I have reported to you.

And may I just ask on this point, what is the accumulated gain on that at Deutsche, currently?

The accumulative gain on that is EUR161m.

That's indeed a tiny number, thanks.

A tiny number.

And therefore it -- I reported it because it switched, but it's not a meaningful number and that's why we also have the benefit on a going-forward basis, that -- the reversal issue that we see with others when the credit spreads were tightened more were not [per] to us.

So hopefully we will get some good payback for keeping the discipline in this issue that obviously, as you can assume, was not always easy, as we deviate from common market practice in this area.

The redemption at fair value.

We obviously -- the experience is that really -- if we had a redemptions it was to the reclassified value or better.

But we haven't done a lot in this, so it's very small, it's very tiny, it's not an important -- not a material effect.

And your question on the NPL here, it's very specific, so we would like to take that question off-line, and we will call you to give you the answer.

I don't have the data in detail for me to spread it out.

Fair enough.

Thanks a lot.

Thank you.

The next question is from Davide Serra, Algebris Investments.

Please go ahead.

Please go ahead, Davide.

Can we take the next question, please?

The next question is from Kian Abouhossein, JP Morgan.

Please go ahead.

Yes, hi.

The first question's on provisions.

I recall listening to an Ackermann presentation where there was a run rate provisioning of about EUR2.7b -- EUR2.5b to EUR3b.

And NPLs are clearly growing much faster than your run rate of provision, except one counter-party risk.

So how should I look at provisions going forward?

That's the first question, on a Group basis, and is there any change from this run rate?

The second question is related to risk taking.

You are clearly reducing a lot of risk, and what I'm wondering is if you can talk a little bit about risk weighted asset, the EUR295m.

Where should we look at going forward?

Level 3 assets at 64b, staff numbers in CIB etc.

14,000.

How should we look at all these different risk brackets and if possible, if you could go one by one, risk weighted assets, Level 3 assets overall, and headcount.

How do you see them developing over time?

Are we done with the de-risking on your balance sheet in terms of structure credit, or are we continuing with that?

Kian, thank you, and I can certainly understand that these are the questions moving us all.

Let me start with your first question relating to the provisions.

This run rate, I must say I am not clear to what you are referring to.

We had, at the beginning of the year, assumed that we would have a lower run rate.

It did somewhat increase, as you can see.

But importantly it continues to impact it by event driven one-offs that obviously as we do them, get off our lists and are -- by far, are related to legacy provisions that we had out of the crisis still to deal with.

So the good news is -- the bad news is they're increasing, the good news is that any hit we have taken is helping us on a going forward basis, to ease the situation because these are one-off related things and the more issues we take off our list the better.

I also alluded that of course, based on our accounting regime, that if we were to see any other ones right now that we would have to take them but based on the fact that at this point in time we feel very comfortable that we took all of the necessary -- now it's very difficult for me to predict any further one-offs.

We don't know what the environment is going to take.

We have reduced -- significantly, our risk position, so that's why, to some extent, obviously we do feel comfortable, but it will obviously depend on how the general environment develops to some extent but then on how specific business developments may occur in the one or the other.

On the rest of the portfolio, the lower and moderate bucket I think was very much in line with, based on the weather out there, you would expect to be provisions at that level.

We even, on average, continue to believe that we hold a good portfolio and are also one of the banks that has hedged its portfolio partially, and therefore are also protected from it.

So that's why we, on the one hand, are pretty aware that we, in our initial feelings -- that we have not been right on our initial feeling on how it would develop, but as we moved on and as we are taking provisions we start to feel more comfortable with where we are and certainly not to see --

We have addressed the portfolios that are in specific risk.

I will specifically tell you we have taken management action in Spain.

We are taking management action in Germany on the collections side, and to increase our benefit there, but we don't see, so we have also taken operational action to deal with the issues.

And the high risk bucket will be event driven, and the high risk bucket will continue to be event driven, rather than run rate driven.

Very difficult to protect -- predict at this point, obviously.

Again, I allude to what I said.

On the risk taking side, our risk-weighted assets.

Yes, we were able to reduce our risk-weighted assets in the quarter.

I did explain the main swings effect.

We had to also take some additional charges based on rating migration.

So our focus remains that we will probably stay at the low EUR300b.

That's our current view, and then it will depend on how substantially we stay below EUR300b.

We will (technical difficulty).

Our current -- If I -- I try to answer your, I think, fairly complex last question, and to some extent it's a question probably a little bit to what the Board's policy is right now.

It always comes back what weather we see ahead of us, and we remain to be cautious in terms of what we see in the environment coming at the Bank.

If the environment gets much better, then we believe we will have a benefit from that, but rather to be cautious right now.

So at this point we continue to -- don't expect to grow the balance sheet.

We want to continue our capital and balance sheet discipline, and to further observe the environment.

If the environment, let's say, sustainably improves, obviously we may change that but at this point this is our view.

Our Tier 1 target remains at 10%.

We don't see any need for any increased Tier 1 target.

Our leverage target remains at 25% as well.

We've [released] it for all business mix.

This is okay.

Our headcount, we have done some reductions.

We have done some adjustments to account for the new market levels of revenues.

But we don't estimate that we have to do any significantly larger steps at this point in time, other than ones that are already booked and they are accounted for with the severance charges that we took in the quarter that, as you know, were quite substantial.

On our Level 3 assets, obviously the parameter -- if markets stay as they are, we'll probably come down.

We once mentioned a figure of around EUR50b Level 3, and that's probably in -- assuming that markets don't deteriorate any further and we get pricing information for some of these models, we'll probably stay around that number.

Okay.

That's very helpful.

Just to -- so it's fair to say that the Board is still taking the view that we should be in a risk reduction mode at this point?

I wouldn't say further risk reduction.

I would say that certainly we have significantly reduced, but will we go back to risk taking?

At this point, the Board's view is that we should not do that, that we should keep our discipline, but we have already taken so much risk down that, from our view, the potential and speed of taking down risk certainly will be reduced.

So we are, let's say, staying on the middle ground outlook right now, and see how the environment develops.

Okay.

And one more quick follow-up on the slide 27, the coverage ratio of 46%.

How much is that, including collateral, and how does it compare to the first quarter number?

I remember you gave it including collateral, I can't recall.

Jernej, I would like to -- sorry, Kian, I would like to add one point only.

Obviously our position will be different than a business mix.

I made a statement on how we take the risk on a Group point of view.

Now you may see us altering between the businesses, just only as an additional, and our -- including the collateral, our coverage ratio was 76%.

I mentioned it on the covering slide, so the 46% goes to 76%.

Okay.

Thank you.

Thanks, Kian.

The next question is from Mr.

Serra, Algebris.

Please go ahead, sir.

Yes, sorry for before.

Can I ask a question regarding the geographic mix, and the competitive landscape?

Given your strength in funding the balance sheet, the core capital, are you seeing -- where are you seeing your position being most improved, particularly within the investment banking business, on a geographic basis and on a product basis?

We believe that, obviously, our European strengths will continue to dominate the bank, especially because also all the -- our stable businesses are mainly European businesses.

So I think that -- in terms of the largest share of our business will continue to be European.

But as I alluded in the presentation, for example in the investment bank, in our equity business, we're making good steps forward in the US.

We're gaining market share there, we see some opportunities to grow in the US.

The same is valid for Asia, in which in certain businesses we see opportunities while other businesses we might de-emphasize in Asia, as we go right now.

We continue to see China as a great opportunity.

Actually, our business performance in China is very strong and very good in a couple of our businesses there, so there is also an opportunity.

So there's also an opportunity.

But obviously whenever we talk about growth ratios, for example in China, they start from a lower base.

It's not that any of these regions were taking a predominant role in our profitability over time.

We will continue to be largely European but with market share gains both in the US and Asia.

And a follow-up second question, regarding -- because I see somehow these numbers, a great top line performance, reduced by some more marks.

So if I look at the IAS 39 impact, on page 30, if I had to see this as potential hits over the next two, three, four, five years, how long will it take for them to fully unfold?

And hence what's the speed which some of these mark-to-markets potential impact are actually realized losses, and how fast are they going to come through?

By basically reducing the great operating performance of top line level?

I must disagree with you in the point that it's a potential loss.

Because the reason we reclassified is because we absolutely do not believe these are potential losses.

And I would again state that knowing these assets now we have -- the development in these areas -- the reason we reclassified them is we believe that due to the lack of pricing in the market you had to -- we would have had to downgrade it to completely unreasonable levels.

That's the reason why the accounting decided to say in non-liquid markets that we need to allow the bank to value these positions more according to their intrinsic value.

We still had to reclassify them, at the market value at the date of the reclassification, which already took a substantial devaluation of these assets into account when they went into the accrual book.

Now they are subject to loan loss provision, and as you saw, especially on the part of the leveraged loan, which is only a small part of these reclassified assets, we have had some (event driven loan loss provision, but in comparison to the potential markdown, marks are still relatively small versus what the mark-to-market valuation of the entire portfolio would have meant.

So actually, we believe that, again, that the reclassification was important, was the right thing to do.

And we do not absolutely believe that the numbers that we regretfully have to report, which our US GAAP filers do not have to report, which is to some extent an imbalance against IFRS filers, this number in my mind confuses more -- provides both more room for confusion than it really provides clarify.

So we don't believe -- we actually believe that zero of this market loss will be (multiple speakers).

Actually, what we should expect in the statistic, as market conditions improve, that the mark-to-market comes now closer back to what we hold these assets on the book.

And actually it may even surpass the value as they are already substantially downgraded in the accrual books, so you may -- we may see even a swing in the other direction, depending on the recovery of market values.

Perfect.

Thank you.

The next question is from Huw van Steenis, Morgan Stanley.

Please go ahead.

Yes, morning.

Perhaps two questions.

One on the revenues.

You mentioned in the comments that the fixed income results in Q2 were impacted a little bit by having had an exceptional Q1, and also by some de-leveraging.

And I was wondering if you could just conceptually divide how much of the decrease was the exceptional Q1, how much was de-leveraging, and how much was just the ups and downs of a trading quarter.

And then secondly, I'd just echo Jernej's comments about, if you could provide NPLs and coverage ratios by the different groups of assets, I think they'd be very helpful to give the market more confidence about the asset quality of some of the underlying businesses.

Okay.

Well, we'll provide that offline.

Let's put these numbers together and then we'll share them with you.

I think you're right that maybe it'll help you to assess the situation a little bit better.

And on the -- your other question, to be honest the effects for the -- on the sales and trading debt positions are obviously very difficult to assume what would be a normal quarter for Q1.

It's only what's important to us in the comparison, I think we are a debt house.

We continue to see strengths, we don't -- the results in Q2 should not show any differently.

We have the technical effect that obviously as we proceed with the de-risking and the balance sheet reductions, we do have some impact on that business area, which is a traditional strength of the Bank.

And also in the Q1 Q2 comparison, it was really an exceptional Q1, and most of the good performances -- we were weak in equity in the first quarter, and most of the good performance that we exhibited in Q1 was related obviously to the debt out.

But just, all in all, I really -- the picture I would like is not an area of concern to us.

Impacted by management actions and not by our traditional strengths in this -- operational strengths in this business.

So not a concern at this point in time.

Okay.

Thanks.

The next question is from Stephen Barrett, Nevsky Capital.

Please go ahead.

Hi.

Could you give an estimate as to what impact the trading book's Basel II changes will have on your Group risk-weighted assets?

And secondly, was there any negative impact in the quarter in terms of hedge losses on your hedge loan book?

Specifically, any CDS losses booked to sales and trading fixed income?

Thanks very much.

Okay, can we move this because we need to get some data -- I need to get some data here.

So maybe we can move it to the next session, and I'll come back to you.

Okay.

Okay, can we have the next question please, Maria?

Yes, sir.

The next question is from Christopher Wheeler, MainFirst Bank.

Please go ahead.

Yes, good morning, everybody.

A couple of questions.

I'm sorry to flog a dead horse again, but in terms of the increase in the non-performing loans, the 44% increase or indeed the increase in the impaired loans, could you at least in the short term give us an idea of how much of that was in relation to the reclassifications?

In other words, the increase from EUR5.7b to EUR8.2b.

The second question is, I'm rather surprised - the write-offs have shrunk to EUR99m -- sorry, net write-offs have shrunk to EUR99m during the quarter, which is interesting given obviously the vast increase in the bad debt charge.

Can you perhaps just give us a brief comment on that?

Third point, on the collateral.

It -- this is an old banking adage, of course.

How much of that is commercial real estate, just roughly, in your mind, would you say?

And then the final two points, the EUR321m of severance charges, obviously you've been involved in a lot of jobs at the Bank in terms of improving efficiency.

What should we look for as we go into the second half in that area, particularly around the asset management area?

And finally, can you just tell us what you now own in Deutsche Postbank.

Sorry for so many questions.

Thank you.

That's quite a load of questions.

Apologies.

Okay, let me try to go - your first question, the NPL.

I said in my statement, I said about EUR2b in relation to IAS 39.

And was that -- how does that compare to the first quarter?

I would have to get back to you.

Thank you, Stefan.

Thank you.

I don't have the chart with the number here.

With your collateral, commercial, real estate number.

That's obviously lots of individual transactions.

We don't summarize to that base and we will not be able to give you this data now.

Because obviously, as you can assume, this is thousands of financing agreements, and each one is independent, so it's a very difficult and detailed question to ask.

On your severance -- EUR321m severance question, it will be the second quarter will be the most impacted by the severance number.

We should now come back to what you could almost call normal levels of severance that we've had.

The reason was that obviously we had to sign agreement with the labor representative in Germany, and as soon as this agreement is signed, at that point we have to take the charge.

Now, as -- obviously the headcount reduction will now occur over the next two to three quarters, effectively, but we have to take the charge as soon as the agreement is in place, and that's why especially the German business was impacted.

For example, CBC was EUR150m - that's specific to Q2.

We should come back.

On [your] Postbank, we are not disclosing that at this point in time.

But of course we are still below 30%, because otherwise obviously we would be in a public mandatory offering that you don't see us exercising right now, so that can be your assumption at this point in time.

But we're not disclosing the exact number at this point in time.

And on the charge-offs?

Can you remind me of that question?

Yes, the charge-offs.

Your net charge-offs are EUR99m in the quarter, which is really low compared to the previous quarter, obviously, in a difficult period.

I just wondered if you wanted to comment on that at all.

Is that just because you think you're going to get all your loans back, he said laughingly.

Yes, it's difficult.

I think I can't comment.

I don't know what kind of comment you expect on that.

It just seems really odd, in a difficult market, to be writing off so little.

It just must -- particularly given, if you compare with the previous quarter.

But I can deal with it offline.

Very low exposure.

It's methodology.

This is not management discretion.

We do it according to a method, and this is low exposure.

That's what it is.

Okay, thank you.

I have the IAS effect on problem loans, in the first quarter it was EUR500m.

Lovely, thank you very much.

That's really helpful.

Thanks, Chris.

The next question is from Mr.

Barrett, Nevsky Capital.

Please go ahead, sir.

Hi, I've already asked my question.

But it was to do with the impact of the Basel Level II changes on your market (multiple speakers)

We disclosed a number of EUR50b, if you remember, over the next couple of years.

We've discussed it a couple of times in the conference calls here based on the fact that we, on the other hand, on the one hand we see the working groups working and that was an estimate we made over the coming years that the market would change according to VaR 2 could really mean to us.

On the other hand, Josef Ackermann has always specifically stated that in all his meetings with regulators obviously he continues to see that there is not necessarily an interest to really create more pressure on capitalization of banks right now.

So to some extent we always give out the cautionary statement that maybe some of these decisions despite will come out in an after crisis scenario, they may not be around as quickly as the market is estimating right now.

Because obviously what sense does it make to put more -- the banks right now under more capital pressure whilst we are in a crisis environment.

So that's what we have seen.

So that's we do to this point.

Sorry, sorry, EUR50b in terms of the impact as to what you've guided previously, you're still sticking with that?

Yes, at this point, yes.

Okay.

Thank you.

Because -- on the other hand we are seeing -- this is obviously a gross number as we are reducing risk weighted assets that you saw also in the quarter.

On the other hand the net impact of capital might not be the one you derive out of the EUR50b, yes?

Sure, sure.

We are taking action.

We will reduce the debt.

So we don't anticipate our true risk weighted asset growth to be EUR50b on top of our current number, yes.

Okay.

I think obviously will change that mix.

Okay, can we have the next question please?

Yes, sure, sir.

The next question is from Fiona Swaffield, Execution Ltd.

Please go ahead, madam.

Hi.

I had three questions.

The first was if we go back to the first quarter slide presentation in sales and trading you had a slide 18 called Earnings Power.

And you were leading the market to look at EUR6.1b as the underlying number.

I would like some help on what the relevant Q2 number would be.

Obviously you've reported about EUR3.6b.

There seems to be EUR100m on write-downs and a bit of fair value of own debt.

So maybe it's something like EUR3.7b or something underlying.

Can you help us with the delta?

And that's the first question.

The second question is if I look on the slides on fixed income or sales trading debt and I compare Q1 with Q2, in the Q2 there's no mention at all of commodities, yet in Q1 there was a very -- a couple of arrows on commodities.

Is some of the swing Q2 to Q1 in the actual sales trading debt due to commodities or is it due to flow, because all of the basis risk I'm still kind of struggling with what's going on in the underlying?

And then the third issue was on the slides when you give all the adjustments of what you think we should adjust for.

I just wondered why, I think it's slide nine, why you hadn't taken out the additional Postbank revenue numbers, I think the ones are reported at the back of the slide pack on the equity pick up, and things like that.

Or am I missing something?

Are those something you think will continue to repeat or am I double counting something?

Thanks.

Okay, let me start the last question.

What we didn't want to do is to give you -- to add to our one-off slides and we were -- the slides that we show where we show the effects, we really wanted to go to one-offs only.

They will only occur in this part, they have no recurring effects.

So that's what the definition we use to put the slides together to show you the different swings we had, because of the substantial and material amount of one-offs that we had to record in the quarter.

From the three Postbank effects the equity pickup effect and obviously the put/call structure which we have to market value will be recurring.

We will have a profitability coming from Postbank, positive or negative.

And we will have on our market valuation of the put/call structure, we might have positive and negative variation as long as we are in the current transaction structure.

So that's why we decided that these are recurring and we should not include them in our table of (technical difficulty).

Okay, can I just double-check my understanding of slide 31 then?

In addition to the EUR234m there is another EUR305m in the CI?

Okay?

Correct.

For the quarter year, but this will be recurring, so that's the difference.

Assuming the share price goes up, it could obviously go the other way, no?

Yes, it can go -- it's a volatile, it's volatile, yes?

Okay, thanks.

The next question is from --

No, no, wait Maria.

,

Okay, sorry.

This is one on our commodities business.

Yes, you know we have a slowdown in the commodities business revenue, which was one of the factors that included there.

That is included in why our sales and trading revenues are slower in Q1 and that's correct.

And then the cleaned up revenue numbers, I think you are -- it's about your calculation, It's like you made it -- obviously on the EUR6.1n we verified for Q1 but the Q2 number I think your calculation is probably correct.

So there are no losses from exited -- so the business is down 40% to 50%?

Yes, in that sense, that calculation, yes.

But I also would like to mention at this point that we did take significant, additional marks in all our positions so I don't want to leave you with the impression that we had a weakening in the overall performance.

Here on a cleanup basis but we did also take those -- the usual de-risking that we had in Q1 that led to that.

I don't have an exact number for you here that I could give you the losses from the exited and repositioned businesses right now.

The markdowns were substantially lower than they were in Q1 because we had a significant monoline charge in Q1.

But the loss on exited we didn't make this calculation to be able to provide you the revenue number of that one.

So the EUR1.1b add back you were putting on the slides in Q1, there is one but it is less?

It will be less, yes.

Much less or --?

I don't know the numbers, so --.

Okay.

(multiple speakers).

Okay.

Thank you, Fiona.

Next question please.

The next question is from Matthew Clark, KBW.

Please go ahead.

Hi, quick question on the IAS 39 reclassified assets.

Could you give us the pa] value of the reclassified assets?

You give us the fair value and the carrying value but could you give us the par value, thanks?

No, we don't -- sorry we don't have that number.

Okay, thanks.

Ladies and gentlemen, can I now ask for a last question and I also repeat my invitation that anybody who has follow up questions, please do not hesitate to contact the Investor Relations team and we will get back to you with answers to specific questions.

Maria?

Yes sir.

The last question is from David Williams, Fox-Pitt, Kelton.

Please go ahead.

Good morning.

I just wondered if you could shed some light on your sales and trading debt, per the slide 19.

At EUR2.7b gross of the markdowns, you're running at the same run rate as the second quarter of last year.

And yet in the commentary on the rates you said one of the best quarters ever.

Clearly we have discussed in the past spread widening across the range of debt and fixed income products.

And if you could clarify what the expression 'easing of competitive pressure and continued flight to stability' means?

It sounds like if there is an easing of competitive pressure you should be doing much better in those businesses.

So I think given a year on year of EUR2.7b versus EUR2.7b, somewhat disappointing given I think the trends that we thought were taking place in the market.

If you could shed some light on that please?

Yes, well it first affected us a little bit already some of the de-risking we did happened in this area and obviously that's a tradeoff you run.

Obviously we are taking out risk, we are reducing balance sheet positions so to some extent that will have a revenue impact.

I talked about the commodities business being somewhat slower in Q2 versus Q1, and then obviously in our finance and FX [rate] we continue to be -- but you know what happened to the exchange rate and to that part of our business and we saw some contraction in the second quarter there as well.

So we continue though to be a market leader.

So it is a more market related contraction in the FX business than it is a specific to Deutsche Bank contraction because we continue to have a large market share and continue to be by far.

And we've been even able to widening the distance to the second competitor in this area.

So it is really largely market driven.

Our development in that area and we are somewhat being punished by a good performance that we had in Q1in the comparison.

The comparison as you correctly said in a difficult quarter last year, which was the second quarter.

And if you compare to the second quarter/second quarter comparison, we are at the revenue level.

And still overall in the big view of things, we still had one of the best quarters ever in this area of the business.

So somewhat these comparisons make our performance look weaker than it really was in the context of a normalized business.

We continue to see, like you correctly stated flight to stability, a flight to quality in this business area.

We will continue to gain market share in this area but the reduced market levels obviously then will have their impact in their development as well.

Last but not least, I will see as we also work on reducing our risk related to Level 3 assets, some of these reduction exercises also had an impact on this business as well.

So in that sense I know that in a comparison this may generate some concerns but we are not operationally concerned at all because we continue to have our market strength, our market position in this.

We are just dealing with weakened markets and obviously also a weakened margin situation overall.

Thank you.

Thank you very much.

In that case, ladies and gentlemen, let me at that point conclude the call.

Thank you very much, all of you, for your attention.

Thank you for your questions and we look forward to continuing the dialogue with you.

Thank you very much.

Ladies and gentlemen.

Thank you for joining and have a pleasant day.

Goodbye.