Deutsche Bank AG (DB) 2011 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the third quarter 2011 conference call of Deutsche Bank.

I'm your operator for this conference.

(Operator Instructions).

At this time I would like to turn the conference over to Joachim Mueller, Head of Investor Relations.

Please go ahead, sir.

Yes, good morning from Berlin and welcome to our third quarter conference call.

You will find all of our documents on the website.

I'd just like to note that the cautionary statements regarding forward-looking statements at the end of the presentation we will use this morning on the back of the pack.

So let's kick off.

Our CFO, Stefan Krause, will lead you through the presentation pack as usual.

We'll try to finish within an hour so there is enough time for you guys to join other conference calls this morning.

With that, I hand over to Stefan.

Thank you Joachim and good morning from Berlin to everybody as well.

Sorry that it is so early in the morning but we had to accommodate the schedules for the whole day.

Let me start with my first chart, key takeaways.

Obviously during the quarter, as you all know, conditions in the global economy were more difficult than any time since the collapse of Lehman in late 2008.

Bank stocks came under intense pressure reflecting obviously the concerns of exposure to peripheral Eurozone, the capital adequacy, the access to liquidity and the funding quality in conditions of market stress.

Deutsche Bank turned in solid results despite charges relating to Greek bond holdings and other specific items.

CB&S remained profitable, impacted by substantial market volatility and client risk aversion, while GTB business and their results reflect the strong performance across all major products with a record quarter in trade finance.

Our PCAM business delivered a year-on-year profit growth in every segment.

Integration of Postbank and Sal.

Oppenheim remains well on track.

Our Core Tier 1 capital ratio remained solid and will be managed in best interests of shareholders to comply with the tightening regulatory regime.

Our funding and liquidity position remains strong with a record EUR180b of liquidity reserves and continued premier access to stable funding sources.

Now let's move into our third quarter results into more detail on page four.

This quarter, as you can see, our Core Tier 1 capital increased to EUR34.1b.

Total adjusted assets were almost EUR1.3 trillion, an increase of EUR 87b compared to the quarter end before.

As per our target definition, the leverage ratio was 22.

Liquidity reserve increased more than EUR30b and exceeds now EUR180b, a record for Deutsche Bank.

Let me turn now to the next page where we show our profitability.

As you can see, third quarter pre-tax profit was EUR942m after EUR228m of impairment related to Greek holdings and EUR310m charge relating to the impairment of a German VAT claim.

This compares to a pre-tax loss of EUR1b after significant charges related to the majority acquisition of Postbank in the third quarter of the previous year.

Net income was EUR777m versus a net loss of EUR1.2b in the prior year quarter.

Net valuation adjustments on fair value with liability were only approximately EUR170m.

If we had applied fair value accounting to our own debt we would have recorded a gain of EUR2.9b in the quarter.

Third quarter effective tax rate was 18% and primarily benefited from changes in the recognition and measurement of deferred tax assets.

The full year tax rate is expected to be around 29% now.

Pre-tax return on equity were 7% in the quarter, 15% for the first nine months of the year.

Let me now turn over to page six to show our expense development.

Our non-interest expenses, as you can see, were EUR5.9b in the quarter, an increase of EUR239m or 4% compared to the previous year quarter.

The primary drivers of the increase were EUR755m relating to the Postbank consolidation and the aforementioned EUR310m charge relating to the impairment of the German VAT claim.

The increase was partially offset by the performance-driven lower bonus accruals and fewer expenses relating to policyholder benefits and claims.

On page seven we show our current capital ratios and risk-weighted assets.

As you can see, the Core Tier 1 capital ratio was at 10.1% as of September 30, materially unchanged from the prior quarter end, but 140 basis points higher than at the beginning of the year.

Let's now move on to the following page where we provide details on the development of our Core Tier 1 capital and risk-weighted assets.

As you can see on page eight, Core Tier 1 capital increased by EUR1.6b to EUR34.1b in the quarter, mainly driven by FX effects, which explain EUR900m of the increase, but also net income.

You may remember that I cautioned you last quarter not to assume a straight line development for risk-weighted asset mitigation.

Additionally the environment forced us to make a decision to slowdown our efforts.

FX movements also materially impacted reported risk-weighted assets, which rose EUR18b to EUR338b with FX effects contributing more than half of the increase.

In addition, you can see we saw EUR9b on risk-weighted assets increases for credit risk.

However, this is mostly related to derivatives where the risk-weighted assets rose by EUR6b as changes in yield curve and widening credit spreads led to higher markets.

On a net basis, which is relevant for risk-weighted assets, we added EUR26b derivative assets to our adjusted balance sheet in the quarter, which naturally led to higher risk-weighted assets.

The remaining increase in the risk-weighted assets of EUR3b is split about half and half between our CIB and PBC lending businesses.

From this, you understand that our credit risk-weighted asset increase is heavily impacted by foreign exchange and changing market rates impacting derivatives [and CM] balances.

The real increase is comparatively small and related to our core lending business only.

Importantly, our de-risking for Basel 2.5 is unaffected by this as it deals with the assets that today do not attract risk-weighted assets and hence are not reflected in our published numbers.

I will talk to Basel 2.5 and Basel 3 more later in the presentation.

Let me move on now to the traditional presentation of our segment results.

As usual I will start with the overview of the divisional performance on page 10.

CB&S remained profitable with a pre-tax profit of EUR70m, including the aforementioned charge of EUR310m relating to this tax topic.

Each of our classic banking businesses increased pre-tax profit versus the third quarter of 2010.

GTB and PCAM produced year-to-date pre-tax profit of EUR3b, the best ever nine-month result and up 80% versus the same period in 2010.

This vindicates our strategy of balancing our earnings with strategic acquisitions in the classic banking businesses in the past few years.

Our Corporate Investment recorded a pre-tax loss of EUR85m, mainly impacted by the performance of our investments, which means Actavis, Maher Terminals, The Cosmopolitan of Las Vegas.

Pre-tax profit in consolidation and adjustments is EUR202m in the third quarter of 2011 compared to a loss of EUR349m in the third quarter of the prior year.

VAT in both periods included significant effects from different accounting methods used for management reporting in IFRS.

And in the current year quarter short-term euro interest rates decreased significantly which resulted in a gain of economically-hedged positions.

On trust, these rates increases in the prior year quarter resulting in a loss in that period.

We also mention that our business in Asia-Pacific contributed [EUR33m] to the Group's EBIT, if I add CIB and PCAM.

So we had a very good very development in that region as well from a regional point of view.

This quarter was a test.

If I go to 11, you will see our Corporate Banking and Security and, as you can see, this quarter was really a test of our recalibrated business model.

The ongoing European sovereign debt crisis had a severe dampening effect on client activity in most products during the quarter.

And, as you know, our business model is fully dependent on client business following the closure of our dedicated prop platforms as part of the recalibration.

Nevertheless we have reported a strong relative result, ranked number three in sales and trading, and a positive result in CB&S especially excluding the impact of the charge relating to the impairment of the German VAT claim.

On a regional basis I'd additionally like to highlight that Asia Pacific delivered a strong and consistent performance.

Our foreign exchange business in Asia delivered very robust results with September being one of the best months ever for this business.

Let me turn on now to page 12.

In Sales and Trading Debt our diversified business again delivered good performance given the current market conditions, actually achieved the number two performance level here.

We actually had a record third quarter in foreign exchange and commodities and a solid performance in emerging markets in rates.

In credit, nevertheless, our client solution business performed well, but we had obviously substantial lower revenues in flow credits reflecting the wider credit spreads and obviously also very much lower client volumes.

If we go to page 13, now, as you know, market conditions were very challenging in equities, especially in derivatives and in Europe.

However, we had higher revenues in cash equities reflecting higher market share in Europe and the United States, good performance in brokerage with client de-risking was offset by a flight to quality.

In equity derivates client activity was very low and this was the main driver of our underperformance.

If we turn now to page 14, our strong global position, which we achieved the number six overall but very close to the number five firm, despite our strength in Europe which had a very slow quarter in this business.

We remain number one in Europe and we have the number five position in Asia.

We had a solid quarter in advisory but market issuance levels were down significantly in Europe.

A what we really have to comment about this business, our pipeline, the pipeline continues to remain strong, but obviously a lot of businesses have made decisions to defer issuance and defer business in this area, which we expect will not be lost business.

Let me now turn to GTB.

We had another solid quarter in GTB with a strong performance across all major products both in interest and fee income, the latter showing that our strategic ambition over the last few years is paying off to move to a more fee-income-based business.

We had a record quarter in trade finance and very good results in cash management.

We are similarly pleased with our performance in Asia Pacific with a 32% year-on-year growth in revenues with stronger client volumes, with India and China contributing 50% of year-to-date revenue.

Year-on-year increase in non-interest expenses is mainly driven by an adjustment related to the amortization and upfront premium paid for credit protection received from ABN Amro during the acquisition of our business in the Netherlands.

So this risk umbrella for the acquired loan book was established upon the change of control.

The respective guarantee was recognised as an asset with a certain value.

With change of control of this asset is being amortized until the umbrella expires.

Formula-based amortization pattern was now changed to better reflect the changes in the underlying risk-adjusted portfolio.

The resulting accelerated amortization was mainly recognized in GTB as an amortization adjustment for the year of 2011.

We now move on to page 16.

In Asset and Wealth Management the pre-tax profit of EUR186m, more than double the third quarter of 2010 results.

Both asset management and private management suffered from the negative impact of unfavorable equity market conditions on revenues from management fees and commissions, as you can assume, while obviously our expense level continues to benefit from the platform efficiencies that we have generated in prior quarters.

Now turn to asset management on page 17.

Our asset management business continues to gather momentum despite the weakening equity markets.

Another good performance mainly benefiting from our platform efficiencies that we have generated.

Costs came down 21% year-over-year to EUR281m.

We also suffered net money outflows of EUR12b, generally reflect obviously, reflecting the investor uncertainly.

However -- this is quite interesting -- due to the favorable asset mix shift, the impact from these net outflows during the year on profitability are really negligible.

Turn on to page 18, private wealth management.

Pre-tax profit contribution remains on target for the first nine months of 2011.

Revenues display the resilience to adverse market conditions and only decreased 4% year over year to EUR479m mainly driven by slightly reduced assed-based fees and some lower performance fees.

Revenues in the prior year quarter also benefited from higher positive effects from non-core businesses in Sal.

Oppenheim.

Margins improved 3 basis points to 77 basis points for the first nine months of this year mainly from improved lending and advisory businesses.

The Sal.

Oppenheim alignment is on track and, which is very important for us, the customer base is now very stable.

We have an overall cost base reduced by 45% on a year-on-year comparison so we have also worked on the efficiency of this business.

Our net money outflow of EUR1b is completely driven obviously by the market downturn in the quarter; PWM has not lost clients.

Page 19, we're going into our PBC, our private and business clients business, which delivered a pre-tax profit of EUR310m after absorbing mark-to-market losses of EUR185m on Greek bonds predominantly held by Postbank.

Apart from this specific charge and the usual seasonal decline, operating performance across PBC remains very solid quarter over quarter.

Lower revenues from investment products reflecting this heightened risk aversion among private clients.

We had a contribution from deposits and payments and credit products, which remains very stable.

At the end we had one of our income slowed down based on the general market condition.

We obviously also became concerned further progress in reducing PBC's cost base and the Postbank integration is very well on track.

I understand that many of you have asked us to disclose the PPA effect relating to the Postbank acquisition.

As you know, according to the accounting rules, we will now close our PPA calculation finally in the fourth quarter of this year and then we will go ahead and disclose for you the final number of the PPA factually.

Let me move on now.

After having covered the performance of the Group in the segments to some key current topics that we felt might be of interest in the current environment.

Let me start on page 21 with the net sovereign exposure on selected countries.

Our GIIPS sovereign exposure was EUR4.4b at September 30, down about two-thirds since December of 2010.

The third quarter net exposures also generally came down with the exception of Italy where we saw higher exposures resulting from our flow derivatives and market-making activities as we continue to make markets in this area.

From an income recognition perspective, we mark all of our Greek sovereign exposure to market since the end of the second quarter and we have taken corresponding charges to P&L.

Average price at which we marked our Greek sovereign position the end of the third quarter was 46% of notional.

Most but not all of our remaining non-Greek GIIPS sovereign exposure is also held at fair value through profit or loss.

Importantly, reflecting the remaining amortized costs and AFS, GIIPS sovereign positions at fair values through profit or loss would cost us EUR270m pre-tax.

As you will see on the next page, the after-tax effect of protecting all our European economic area sovereign debt at fair value would have been even smaller, namely about EUR100m, certainly not a material amount in the context of our capital base.

What we have done now on chart 22, which I assume will get us some questions around and that's why I like to position it correctly, we will provide you with two capital slides.

And the difference is the first capital slide is just a simulation, the deal with what we expect the rules to be around the capitalization for European banks that will be part of the European overall package.

The second slide will just give you an update where we stand with our Basel 2.5 and 3 efforts.

We have to separate them because obviously they deal with different regulatory principles and different regulatory backgrounds.

That's why please always separate both charts because they deal with two very different topics.

Let me spend first some time to walk you through the simulation that illustrates why we are so comfortable that Deutsche Bank does not need any public sector money.

On the slide first our Core Tier 1 ratio at the end of the third quarter, as you can see, was a strong 10.1%, nearly 1.5 percentage points higher than the one at the beginning of the year.

Then we added we currently expect to be the impact of Basel 2.5 when it goes live at the end of this quarter.

You will see we put down EUR76b higher risk-weighted assets but also EUR800m higher capital, which means the risk-weighted equivalent net impact, EUR66b, which covers both trading and banking book rule changes.

We had given you a banking book target of EUR50b that, as you can see, we will slightly miss by a decision that we have made so far based on slowing down our effort looking at the environment right now.

In the next step we simulate the impact of treating all European sovereign ASFs and amortized cost positions at fair value.

For us this would be a mere EUR100m, as I have said, a mere EUR100m as, remember, all Greek exposures are already at fair value and our other GIIPS sovereign exposure is small and mostly at fair value as well.

Now in the last step on this chart we added the latest market expected net income for the fourth quarter and for the first half year of 2012, simulating we would have to meet higher capital requirements at the end of June of 2012.

And as you can see from this simulation, we arrived just based on this net, at 9.1% without any additional management action, without any management action other than the Basel 2.5 actions related in the fourth quarter of '11.

This means that we achieve 9% and still have the whole toolbox of capital management actions at our disposal to further improve our capital position or to compensate for any net income shortfalls in case we do not meet current market expectations.

Clearly we do have legacy assets in our investment banks that we intend to further reduce and which, in any case, will roll off over time.

Also in Postbank, the refocusing on our customer bank also continues and non-core positions will come down.

We don't need to go into more details and you can see why we feel so comfortable with our capital position at this point in time, but obviously it's very clear we need to keep our overall risk discipline.

Now more important, even looking at this chart which I clearly want to emphasize, even if within the rule further de-risking would not be allowed, as you can see with the management actions that we have planned for Basel 2.5 we would not need to do any further activity.

On the next page now I'm trying to give you an update of the chart we produced for you a year ago and really see it only as an update and, again, the core message here to take away that there is not much of a change versus last year.

In other words, Basel 2.5 in the current debate on bank capitalization is most relevant obviously for you and us today, but I just also wanted to give you a view on where we stand on our Basel 3.

So a year ago I showed you the same simulation where we said that we have a net risk-weighted asset equivalent impact of EUR125b from the Basel 2.5 and 3 package.

That's what we still believe today.

On the chart you find this reflected as the combination of EUR176b higher risk-weighted assets, but also EUR4b higher capital, which is equivalent to EUR50b risk-weighted asset savings.

So in aggregate that gives you the EUR125b risk-weighted equivalent impact.

Now if one adds the latest analyst net income for the time between now and January 1, 2013, we arrive at the simulated Core Tier 1 ratio under Basel 3 of 8.5%.

So it is exactly as we did indicate in the simulation a year ago.

It means that in order to achieve a Core Tier 1 ratio of 9% under the then stricter Basel 3 rule set, for example, we would need to deliver on management action outside of Basel 2.5 to 3 of approximately EUR30b risk-weighted assets equivalent.

But again this 9% is only a guess of where markets may want to see us.

But to be clear any potential gap to 9% can be closed by risk-weighted asset measures or capital measures, or a combination of both.

And we will choose the most effective combination of measures to allow our businesses to continue serving our clients, at the same time obviously to ensure that the Bank remains well-capitalized.

So as you know me, I always believe that the funding and liquidity situation at least as important as the capital situation that I would like to move on page 24 now to our funding and liquidity.

Deutsche Bank, as you know, has substantial rebalanced towards the most stable funding sources by significant reduction in utilization of short term funding sources to build up high liquidity reserves to buffer against extreme stress scenarios, and we have strong capital markets access and an evenly-balanced maturity profile.

Structurally, Deutsche Bank is long funded across all time buckets and let me give you some more detail on page 25.

In 2007, we have significantly rebalanced our funding mix towards more stable sources.

As you can see in the chart, roughly 55% of our funding comes from the most stable sources versus just 30% at June 30 of 2007.

A strong driver of the strategic rationale to become a larger, more credible player in retail banking was to increase our access and capacity to funds via retail deposits, which we have more than doubled since 2007.

And as a Group our loan to deposit ratio is approximately 78% and we continue to be an attractive deposit taker across our retail and corporate franchise.

This rebalancing that helps us to maintain premier access to a broad range of stable sources even through difficult times and through times of stress, as we are experiencing now.

Now let me move on now to page 26.

I give you some more details.

We hold liquidity reserves for the protection against the potential stress outflows, the most sensitive of which is unsecured wholesale funding.

Unlike some market participants, we maintain a strong access to unsecured wholesale funding and have actually increased volumes throughout the quarter.

This increase in unsecured wholesale funding has solely been invested in additional liquidity reserves.

It's not required under any core business activities.

Our EUR180b liquidity reserve predominantly consists of the highest quality and most liquid assets, cash and central bank eligible securities.

Also of note is that within unsecured wholesale funding our financing for money market funds, that are typically more sensitive to liability demands of their own, is relatively small, representing just 3% of our overall funding.

On page 27 we told you that how our CDS developed.

To start with, this, I can tell you that we have completed more than 100% of our current year funding plan and we have now already also started to pre-fund for 2012.

The strength of our funding franchise was demonstrated, as you know, by our recent EUR1.75b floating rate note.

This was the first senior unsecured bank issuance in 12 weeks.

The order book was oversubscribed and the deal spread is tighter following the issue.

Our CDS volatility is caused by many factors, as you know, and they are not obviously, in CDS are not representative of our actual issuance levels.

That's been at much tighter spreads.

Our average issuance spread right now LIBOR plus 70 basis points.

There you can see a significant difference to our CDS.

As we look forward to 2012, we have recently initiated a new retail deposit campaign through PBC to help to raise several billion of deposits at attractive rates before the year ends for that campaign.

Let me move on to page 28.

You know, if you look at cash flow profile, we are having here the benefit of the disciplined funding strategy where we didn't compromise the duration of our portfolio for short-term gains.

As you can see on the chart, do not have significant concentrations of financing needs at any time in the next 10 years.

Just as importantly, we calibrate our long-term capital market issuance against our long-term asset profile, both contractual and model environment surplus, across all term brackets, as you can see from the chart.

Obviously the current stress in the funding market isn't good for the banking sector or the economy as a whole.

However, we feel very well placed to continue to support our clients and partly due to our well-funding element.

So on page 29, and let me conclude before we open up for questions, I think Deutsche Bank has really shown strength in the face of very challenging conditions.

Our investment banking remains profitable even in extremely turbulent markets.

Our classic banking businesses continue to produce record operating performance.

This is achieved without significant own-debt valuation adjustment.

Capital ratios remain close to the strongest ever level.

Proactive management of capital base will ensure alignment of shareholder interest with obviously all these regulatory requirements we have to deal with.

Further strengthening of our liquidity position and a substantial high-quality funding base despite stress conditions is what we will continue to focus on.

Continue to also focus on improving our operational and risk efficiency.

Cost initiatives and integrations of acquisitions continue to be well on track.

As significant uncertainties persist for the world economy and financial markets with a near-term outlook highly dependent on decisive resolution of the sovereign debt crisis in Europe in the banking system, we obviously continue to expect that we will have challenging times.

So, all in all, Deutsche Bank is committed to further optimizing its business model, and notwithstanding potential changes in regulations, in the best interests of its shareholders and also sustainable funding model, which will allow us to perform in all parts of our business.

Thank you very much.

We will now begin the question and answer session.

(Operator Instructions).

First question comes from Huw van Steenis from Morgan Stanley.

May we have your question, please?

Hello Huw.

We cannot hear anything in the room here.

May we have your question please, Mr.

Steenis?

Okay, so we change to the next question.

The next question comes from Derek De Vries of Bank of America.

May we have your question, please?

Sure, I've got a few questions, if alright.

And apologies if this is in there, I haven't had chance to get through it in great detail, but I was hoping you'd give us a little disclosure on the EUR310m of on impairment and German VAT and litigation.

I just want to understand if I should be stripping that out as truly exceptional.

And then I guess related to the investment, CB&S as well, obviously is a very difficult quarter for the Industry and that's reflected in your numbers.

I'm just wondering how long you could take this low level of profitability or in fact no profitability, before you decide to make some significant reduction in headcount.

So can you live with this level of profitability for two, three quarters, before you decide to make significant changes in headcount?

And then my last question I guess would be on slide 22.

Is that exercise, is that just for analysts to get their heads around or do you think that's actually how the European Commission or EBA, or whoever is actually going to carry out that exercise?

And specifically the decision not to have any organic growth in risk-weighted assets in there despite the fact that you've put in three quarters, rather conservatively put in three quarters of consensus profitability.

So those are my three questions, thanks.

Yes, thank you Derek.

Let me start with your first question.

You know this charge represents Deutsche Bank's German input VAT relating to carbon emission rights trading, the date from July 2009 to April 2010.

And this amount normally is tax deductible.

In Q3 Deutsche Bank, we obtained some additional information during the public court proceedings relating this VAT fraud that occurred around the carbon emission rates' trading in Germany.

Deutsche Bank, only to clarify, is currently not a party to this criminal proceeding and obviously we don't have direct access to the records.

That's why as a precautionary measure and based on legal advice we have decided not to claim at this point the input VAT for carbon emission rights trading for this period of time that I mentioned.

Obviously we will reserve our right to reclaim this input-VAT from the tax authorities at a later point in time as soon as these legal proceedings are done.

So only to answer your question, this is clearly a one-off item.

This is a specific for us situation and obviously has nothing to do with our ongoing business.

Second question was how long we could withstand the current level of profitability before headcount reductions.

As you know, Joachim did announce that we are doing some headcount reductions already in the fourth quarter and going into the first quarter of next year.

This is what we announced so we are adjusting the platform and we will continue to do so of course if the environment persists.

But let's not forget we were the Investment Bank that went in first and since our peak we are 10% down in our headcount already.

So we have been always proactive on the investment bank reduced headcount according to our business development.

So that's why we didn't have to have a significant cut in this quarter.

And on slide 22 whether, your question was whether that's based on what we believe the EBA stress test or the EBA requirements will really be.

Obviously we don't specifically know what we will -- what they will require from us.

But we do have obviously some good ideas based on the talks we entertain with several people.

And the purpose of the chart is really to illustrate to you that without any additional management actions we will get to this 9.1%, assuming even your conservative net income projection as per analysts' forecast.

And then that we even, let's say, if this net income based on current conditions weren't to come in at this level, that we still have the toolbox to deal with any requirements that might exist at that point in time.

So it was for us mainly to show you that the math, the straight math shows that we will get to this 9.1% without a problem.

We even did assume -- this is one of the potential scenarios -- that further de-risking action might not be possible based on the agreement.

And we also wanted to show we do not need any further de-risking action to get there because obviously one of the scenarios, one of the assumptions, could be that banks will not be allowed to do their balance sheets from a current state.

So I think that was the important message for us to tell you that we, even not utilizing the entire toolbox that we have, that we still have cushion, that we still have ample flexibility to exercise other measures if required.

But that our current math shows that we will match the most likely number that we hear, which will be the 9%.

Perfect.

That's all very clear.

I appreciate it.

Thank you.

Next question comes from Kian Abouhossein from JP Morgan Securities.

May we have your question, please?

Yes, hi.

The first question is related to NPL coverage.

What should we expect, assuming NPLs go up over time what should we expect as a run rate?

Around 47%, 48%, is that a fair number that we should assume?

The second question is on your structured credit assets.

Should we assume that in this environment it's less likely that you are going to sell assets in 2012, assuming that we are looking at prices at current levels, because you've done a great job so far disposing of them?

And then the third question is on the liquidity information, which is very useful.

I'm trying to understand two things.

One is how much does it cost you, or do you actually make profit on your liquidity position?

And secondly how should I think about slide 28?

What I try to understand is if you have a counterparty derivative exposure, how is that managed on a like-for-like basis, i.e.

are you breakeven with all your counterparties across your Business, i.e.

you have a net master agreement of more or less zero?

Hi Kian.

Thanks for the questions.

On the, let me start on the NPL coverage ratio.

On impaired loans coverage ratio actually we've added in the deck in the page (inaudible) the effect of Postbank, which is a technical effect which has to do with the acquisition, obviously, accounting.

And yes, I think our coverage will be around that size, so 46%.

I have cautioned you because what's happening in this statistic over time is as we fair valued all the loans as acquisitions, obviously these acquisitions did not go into this statistic because as being fair valued they had no reserves versus them and therefore they were not part of the statistic.

As we now move on in time and we provide loan loss provisions on to these Postbank loans obviously they will migrate into the statistic.

The second thing I caution you also expect, if you look at the NPL from Postbank, which are about in the size of EUR2.5b to EUR2.7b, we will slowly migrate and add on this number to our number.

So Deutsche Bank should be around EUR10b, around, so don't be surprised.

This is just a technical effect of moving up to this number.

So I think 46%, 47%, 48% is a good assumption for --

Second question was the structured credit assets.

I think that what we have I can almost say the luxury in our point of view to do right now we decided to slow down as market conditions worsened.

We decided not to take a significant P&L hit under which we could have moved more assets out of our books in the last quarter.

And at this point in time we just decided to slow down a little bit our effort.

Of course our view is always that it is capital accretive.

We could move to the next step and accept certain P&L losses assuming that the risk-weighted asset releases will be higher, substantially higher than the P&L impact.

That would be, if you so will, our second line of defense and then action we could take.

So in that sense we still don't believe that it's very difficult to sell these assets.

It's just a question of how much willingness of P&L.

Then let's not forget that there's always a roll off, a natural maturity profile of these and they will roll off the schedule.

And how much of the liquidity cost that we make profits, I think we'll have to come back to you on that as I don't have the numbers here with you.

But you can assume that a substantial amount of our liquidity comes from our stable funding sources and there isn't a substantial negative carry from borrowing long and investing short.

So we wouldn't estimate this at this point to be a big P&L impact, but we'll have to come back to you to answer this question.

On the derivatives, yes, our assumption is that we do have a master netting agreement in place and therefore obviously that's our assumption that we are protected there.

And lastly just one quick one, the EUR30b to get to 9%.

Can you just give a little bit more detail where that's coming from?

Is this Postbank and legacy asset or is there something else?

No this -- don't forget the EUR30b to come to 9% is just again a calculation that we gave you.

That's what we would need to take.

And of course actually, as I said before, it could come from Postbank where we could do some more action.

It could come from others, other areas.

We don't necessarily are planning to do this EUR30b at this point in time.

I only put in the EUR30b to give you a size of the number of what it would take to require us to get to the 9%.

At this point in time, as we have communicated, the 8.5%, we feel comfortable with the 8.5%.

Let's not forget this is all at the beginning of 2013.

We have also given you a number that we will be above the 9% at the end of 2013.

And therefore the question only becomes in case we would have to accelerate something, which is currently no rule impacting.

There's nothing that forces us to do, other than maybe market needs or market perception, or market views, but from an internal point of view we don't think that we need to do this EUR30b.

It just was to give you about an estimate so you have an idea of what the difference would be to get to a 9%.

Let's not forget, and that's why I said it, very importantly, that these European rules that will apply to the mid of next year, which is our view 9% mid of next year eventually with limits on what you can do on reducing your balance sheet size.

This is a different, different view we have to take.

The other was just an update for Basel.

Don't forget that we will be far above all Basel required minimum capital ratios by with 8.5% at the beginning of January.

So there is no pressure to do additional, to take additional measures other than our usual and endless market view discussion.

Thank you.

The next question is from Philipp Zieschang of UBS.

Please go ahead, sir.

Good morning.

Two questions please.

The first one is just on your new update on Basel 2.5 and Basel 3, and the second one is on corporate investment.

On Basel 2.5 and Basel 3, am I right in understanding that what used to be roughly a net impact of EUR188b guidance after mitigation is now EUR176b, and that the delta is simply that you have less add-backs or securitization deductions?

And following up --

I can give you that answer right away.

Yes.

And then basically of that EUR90b targeted management action, am I right in understanding that it's rather in your view a timing difference that you say, okay, you might only achieve roughly EUR14b or so, as per your slide 22 and then the remaining EUR76b billion are all subject for 2012?

And is there a shift in terms of mitigation planned from Basel 2.5 to Basel 3 or is it still the same plan, just pushed more towards 2012?

Yes, it's absolutely the same plan and we've pushed it more towards 2012.

That's why we are not exactly meeting the EUR50b for the banking book that we had set previously, but we made the conscious decision to delay some of it and not to take P&L hits right now.

You've guided back then roughly EUR8b capital deductions under Basel 3 to be phased in 2014 to 2018.

Could you just comment what amount of that EUR8b is deferred tax assets which you expect to utilize until the start of Basel 3?

I don't --- that, Philipp, we might have to come back to you on that question because I don't have that number obviously.

But we can do it effectively right now.

Thanks.

And then a final one on Corporate Investments, given that it has become a bit of a mixed bag I believe, also including BHF as now.

What is your sense in terms of profitability of pre-tax profits, the development of that division in a tougher market environment going into 2012?

We actually, if I look into this different assets obviously we have done -- we have a lot of one-offs in BHF because obviously in order to prepare BHF for sale we completely cleaned up the balance sheet and that took some toll in Corporate Investments.

So I don't anticipate -- I anticipate BHF to be better from now on and not to have to carry any significant.

Then we are completely done with the clean up of that balance sheet.

It's completely free of any sovereign debt now, of any sovereign debt, and it's completely free of any other risky assets.

So in that sense obviously we decided to do really a complete clean up.

Mainly because obviously we want the bank if we sell it and it goes on of its own to be able to survive in the current environment.

On the second, it's Maher Terminals.

Maher Terminals is our port business.

I expect it to be at the same level as it has impacted.

This is mainly impacted by a one-off, by another one-off, by a swap that was made in bad times.

For us it's causing some burdens.

I expect it to be at the same level.

Our casino is improving.

As we speak we have improved profitability and we expect for 2012 improved business trend.

We don't see, and we can honestly say that we see that all our start-up costs will be done with this year and that we therefore will be in positive territory next year.

And then last, but not least, our Actavis, there were to be other largest one, is very profitable and is a profitable pharmaceutical business.

And pharmaceutical businesses don't get impacted by crises, as I've learned.

People still take medicine, maybe even more medicine in bad times than in good times.

So I expect for that business no impact.

So overall this is not a very sensitive, general-economy-sensitive business.

And the Maher impact and the Cosmo impact, which might be the two businesses that are more likely to be impacted by general economic changes, the impacts are minimal.

We are talking a EUR10m-type things, not more.

Thank you.

Next question is from Stuart Graham of Autonomous Research.

Please go ahead sir.

Hi.

I've got a few questions.

On the slide 22, the Basel 2.5 impact, can you just explain what the EUR800m Core Tier 1 capital is?

That's the first question.

Then the second question is on the slide 23, where you are talking about the 8.5%, you are still talking about phased in, not with full-fat Basel 3 deductions.

Is that because you think that's the right way of looking at it or just because you are replicating the math you showed us back in the previous slide?

I'm interested in how you think we should look at your Basel 3, full fat or with phased in deductions, because most of your peers are now talking full fat.

And then my final question is can you give us the figures for gross sovereign CDS protection you've written on the PIGS, so pre netting and collateral and pre any offsetting protection that you've bought?

Thanks.

Okay, Stuart, let me start with the EUR800m.

That's a reduction in the trading book, securitization deduction that we are taking today.

And this was a charge, as you remember I reported on this charge a couple of times that we have to take last year due to a very strict rule interpretation that existed in Germany, and that we had agreed that we had to take based on this German rule.

This German rule goes away with the Basel 2.5 implementation because actually what happens is that this Basel 2.5 framework comes very close to what is original German rule intended to do.

And therefore this additional charge that we needed to take, we don't need to take any more.

So that's the background of it.

So it's something that will for sure fall away and we have confirmation of this, that this additional deduction, we will not be -- we don't need under Basel 2.5.

Okay, that's clear.

Thanks.

So under Basel 2.5, obviously we have to deduct less for these securitizations.

That's the background of this.

The second question was the fully phased-in versus the phased-in approach.

Honestly if you -- there's a lot of math going around and a lot of effort, and if we go away and we said what the Bank would really require to operate, so what the Bank would really require it's the non-phased in approach.

And that's the way we look at it because at the end the reality and the reported numbers in January of (inaudible), will not be with -- will be without the sales in numbers because at the end that's what the regulation says and that's what we are going to report again, yes?

And I think all this speculation goes around what will the market think and what will the market think is necessary, and what will the market think is necessary, and you've heard me, heard very often having this endless discussion.

Deutsche Bank, why do we need different capital ratios if we can't fund competitively, if we are well funded, if it doesn't have an impact on our rating, if we don't get any other benefit?

And we do believe that at some point a return on equity discussion will be back and at that point in time I think what we've all learned in businesses is that we also should manage the Bank to a tighter capital does make a lot of sense.

And I can tell you only one thing from my daily experience as CFO, I'm really happy that we're managing the Bank tight on capital because the activity and the focus and the quality improvement in our P&L and everything we are doing to manage to this tight capital regime is very good for the underlying businesses.

The benefits that you have on a tighter capital managed basis than if you have businesses running around with generous capital accounts and without the pressure, I think it's improving the quality of the Bank tremendously.

And I can really say that out of the daily experience we have.

So we just think this way.

I think this, the 8.5%, this is what we should have.

At the beginning we've also said to you that we will be at over 9% by the end of that year.

So from our perspective I think we are fine in capital.

Market may take another view, but we are accepting the safest approach as the rules under which we have to operate our Bank.

So -- and then your last question was gross sovereign exposure to the PIGS countries.

The gross sovereign CDS protection you've written.

That was, it's about EUR4.8b.

If I said excluding the CDS or is -- hold on.

Excluding the CDS hedging and derivatives collateral, [GACs] gross exposure is EUR12.8b, so which we only have very limited CDS net bought protection of about EUR200m.

In fact on most countries we are in a position of net sold protection to others, which is included in our net exposure.

So that EUR4.8b is the gross sovereign CDS protection you've written to other banks and counterparties on the PIGS, yes?

No, the -- no, hold on.

What we've written is the very limited CDSs, the EUR200m.

That is very limited CDS net bought protection.

The EUR4.8b is, excluding CDS hedging and derivative collateral, our remaining risk exposure at the total.

But I showed you the net number of EUR4.4b, right, in the chart, and if we gross we that up and gross it up it's EUR4.8m.

Okay, alright.

That's great.

Thanks very much.

The minimal between our net and our --- the point is our difference between our net and our gross exposure is very minimal.

Yes, got it.

Thanks.

EUR4.8b.

Thank you.

The next question comes from Jeremy Sigee of Barclays Capital.

Thank you.

Just a couple of questions please.

I'm still on slide 22.

I just wanted to be totally clear.

In the Basel 2.5 impact after four key management actions, so the EUR76b on RWAs and the EUR0.8b, could you tell us exactly what the -- how much the management action is in the EUR76b and maybe in the EUR0.8m, if applicable?

That's the first question.

The second question on that is, am I understanding correctly you're saying this is what your math shows?

I'm just wondering how confident you would be that it's the simple math that determines a decision or would there be political pressure of whatever kind for you to take capital for the greater good?

So that is the first couple of questions.

And then lastly I just wanted to ask a bit more on funding, what your view is on the state of funding markets.

After your successful issue the other day, do you feel you could do more so and generally how do you view that market?

Okay, let me start first on slide, on your slide discussion and how much management action is included.

In the management action included for the first quarter is about a remaining EUR9b risk-weighted asset equivalent of (technical difficulty) left to do and it's solely Basel 2.5 related.

And that's an important message.

No other management action is required to make the math work at this stage, so we --

It's just EUR9b in the RWAs?

There's nothing in the EUR0.8b of capital?

There is the deduction, but there's no management here I think if I understood your definition of management action correctly.

It's your definition.

You're saying that the EUR76b and EUR0.8b are after management action and I'm saying how much?

EUR9b.

EUR9b, great.

Okay.

The second, your question whether this math will work or whether there will be political pressure or greater good of citizens, I think clearly answer this question was no.

The agreement is that there will be a set of rules and this set of rules we will have to comply with, and they will define whether our Bank is force funded or not.

And all we are very confident in saying that according to the math that I've shown you that we will not require government funding.

And there will be no pressure.

It doesn't make any sense.

Let's not forget this is taxpayer money and I don't think that they will do.

And also unnecessarily, look at this stress situation in Europe, that they will unnecessarily give funds to banks that according to their own rules don't need it.

So we don't [ask] this.

And actually even if you added in the EUR9b then, even if that's disallowed, you're still about 9%, aren't you, so you're still just about passing?

We are just about passing and again it really is a question then how our plan in terms of profitability versus analysts' expectations come in, etc.

So there is obviously (technical difficulty).

And then to your last question, obviously our funding market obviously remains stressed and funding markets remain stressed.

But we were obviously very positive that our recent issue was oversubscribed and that we continue to be able to attract flows even from unsecured wholesale funding since that there is starting to be some credit differentiation in the market.

And that we are certainly in the right position for this credit differentiation to take place.

So that's why we're not pessimistic but we know that funding markets continue to be stressed currently.

And, sorry, just on funding, on slide 27 you talk about EUR6b raised during the third quarter, presumably private placements, is that -- what sort of -- are those five-year placements being done or what sort of placements are those?

That number contains all our (inaudible).

It contains deposits, yes, a little bit of deposits, and also contains other funding activities.

I don't know --

So it's the total.

I think we'll have to give you back some numbers --

No problem.

Thank you very much.

Thank you.

This was our questions.

I would like to hand back to Joachim Mueller.

Okay, I guess we need to stop here in the interests of time.

I understand that there are some further questions.

Please come to us in IR.

We are happy to answer all of them where we can.

With that, I'd like to thank you for your interest in Deutsche Bank.

See you on the road and have a good day.

Ladies and gentlemen, the conference is now concluded.

Thank you for joining and have a pleasant day.

Goodbye.