Deutsche Bank AG (DB) 2014 Q2 法說會逐字稿

Thank you. Good morning, everyone, and thank you, operator. Thank you for joining us this morning to discuss our second-quarter results.

As usual, the call will be led today by our Co-CEO, Anshu Jain, and our CFO, Stefan Krause. Anshu will give you some opening commentary on highlights of the quarter, and then Stefan will take you through the more detailed analyst deck. As always, the presentation materials are currently available on our website.

We remind you to pay attention to the cautionary statements regarding forward-looking statements at the end of the presentation.

And with that, I will turn it over to Anshu.

Thank you, John. Good morning, everyone.

As you will have seen by now, we produced a solid set of results this quarter. Pre-tax profits were EUR917m, up 16% year on year. And our core bank continued to deliver strong profitability, with pre-tax profits up slightly at EUR1.5b, despite tough operating conditions.

As always, I'd like to highlight a few notable developments during the quarter. Let me turn first to capital.

As you know, we took decisive action to strengthen our capital base in two key steps during the second quarter. We raised EUR8.5b of common equity through a rights issue and private placement. We also raised EUR3.5b of additional tier 1, capital and we were gratified that demand exceeded supply by around 7 times.

These two issues reflect our commitment to two objectives. First, to build the capital strength that supports our business model and enables us to grow our franchise. And second, to put responsible safeguards in place and play our part in strengthening the safety and stability of the banking system.

Now, let me discuss our core businesses, turning first to CB&S. Some of you understandably have asked two particular questions about this business. First, you've asked whether given tight control of resources, we might be losing market share. This quarter, CB&S produced pre-tax profits which were up 17% year on year, revenues were stable, a strong result relative to the industry for the second consecutive quarter.

In debt sales and trading, revenues were strong in relative terms and we regained our global top three position in global fixed income. Furthermore, we produced resilient revenues in equities trading and our best ever market share in corporate finance, with the best revenues since 2010, reflecting an increase in capital markets and advisory activity.

Second, you've asked whether the challenges facing this business are structural or cyclical. The answer clearly is both. We're taking specific steps to address the structural issues the industry faces. We expect the challenges around volumes and volatility to persist in the near and medium term. To address the cyclical challenge, we remain committed to continuing to adjust our platform, where needed, to deliver acceptable returns.

Deutsche Bank's business model is based on four strong pillars. So let me now turn to the three core businesses outside CB&S, which account for around 50% of our profitability in the quarter.

Turning first to PBC and global transaction banking, both these businesses faced headwinds during the quarter, with near zero interest rates in core markets, margin pressure and ongoing investment into franchise growth. Despite these conditions, both businesses produced solid results which were on a par with the second quarter last year, excluding certain one-off effects.

Let me turn finally to Deutsche asset and wealth management. This business was under strategic review when we launched our new strategy in 2012, and we made a clear commitment to it as a core business. Deutsche asset and wealth management faced the most complex organizational task, turning five businesses into a single integrated platform.

The progress we're making is evident this quarter. We've more than doubled pre-tax profits year on year, improved revenue quality and attracted some EUR11b in net money inflows, our best quarterly inflows since 2010.

Finally, a word on costs. Our operational excellence program, or OpEx, continued to deliver results this quarter. We generated more than EUR250m of additional savings, which put our cumulative savings for the program to EUR2.6b, well on track versus our yearend target of EUR2.9b and our program target of EUR4.5b.

Simultaneously, in a changing regulatory environment, we continue to make investments in our systems and controls environment. Near term, these investments will counterbalance savings from the OpEx program. However, in the long term, this makes us a stronger bank.

Now, let me hand over to Stefan, who will go through the financial results, and after that we both look forward to your questions. Thank you for your attention.

Thank you, Anshu, and good morning and thanks for joining us.

Let's start with the highlights of the quarter, if you turn to page 1. Group income before income taxes you can see was EUR917m, 16% higher from the second quarter last year. Core bank IBIT increased by 2% to EUR1.5b.

The estimated fully loaded core tier 1 ratio was 11.5%. And our leverage ratio was 3.4% on a fully loaded basis. On an adjusted basis, the ratio stands at 4.1%, 90 basis points up versus end of March. By the way, from this quarter on, we will change our reporting and use the fully loaded leverage ratio on a going forward basis.

Let me turn to page 2. This slide, as you can see, illustrates the underlying results of our core bank in the quarter of EUR2.4b, in line with last year's quarter. We are now at EUR5b pre-tax adjusted IBIT for the core bank within the first half year of 2014. I think this reflects the underlying earnings power of our platform.

Let me address now some key current themes, capital, leverage and litigation, before moving on to the Group and segment results. So let's turn to page 4.

As you can see, our capital raise increased our key ratios, created capacity for further business development and gave us a buffer for a number of uncertainties, including obviously the prudential valuation, where we retain our past estimate of potential impact, but the precise impact and timing remain uncertain. CVA, RWA, where the new technical standards must be implemented.

Potential incremental capital requirements from the transition to a single regulator this year; here we have no specific known items that may impact capital, but are cognizant that there could be incremental issues arising as the ECB takes over, possibly resulting from harmonization across Europe or from regulatory conservatism which may differ from IFRS accounting standards.

Potential capital impacts from AQR and stress test, if any, which we will have greater certainty about in the fall. Last but not least, expected significant increases in operational risk RWA due to the industry-wide litigation settlements and continued regulatory focus on operational risks.

The net impact is that we do anticipate some decline in our core tier 1 ratio in coming quarters, and to the extent our reported capital is impacted, our CRD4 leverage ratio before it picks up again due to our retained earnings momentum.

Let me now give you more details on our solvency and leverage ratio movements in the quarter, page 5. We illustrate the trends in core tier 1 and capital, as you are accustomed. Our common tier 1 capital increased by EUR10.7b from the first quarter 2014. The increase principally reflects gross proceeds from our share issuance of EUR8.5b, and obviously a further EUR1.3b for the related 10/15 effect, net of issuance costs and dividend accruals for the newly issued shares.

The remaining EUR900m increase includes a number of items as illustrated, starting with positive contributions from lower DTA related deductions as a result of positive taxable income, lower other capital deduction items and a positive FX effect as well as net income. On the other side, dividend accruals and unrealized gains and losses, including a capital charge taking on a specific NCOU asset, lowered our core tier 1 capital by EUR0.5b in the quarter.

RWA increased by EUR25b, including EUR3.7b in relation to the capital raise and EUR1.5b from FX effect. The largest increase of EUR7.8b related to operational risk RWA, principally all from model and methodology changes. And CVA RWA were higher by EUR4.9b, including a regulatory adjustment of EUR2.5b.

Taken together, this means just over EUR10b rule related RWA increases for this quarter. That said, credit risk RWA increased by EUR2.7b, with CB&S being the main driver, and market risk RWA were up by EUR4.6b, primarily relating to trading book securitization.

Now let me turn a little bit more in detail to leverage, on page 6. The quarterly increase in our CRD4 fully loaded tier 1 capital mirrors those in our core tier 1 capital, most notably our equity raise, but also includes the EUR3.5b proceeds from our successful additional tier 1 issuance.

On the exposure side, we saw an increase of EUR24b over the quarter, or EUR15b excluding FX. When looking at this increase, you should consider that the EUR8.5b proceeds or the large majority of the EUR8.5b proceeds from our capital raise came in right on the last days of the quarter.

That said, we saw reductions in NCOU and derivatives, which, however, were more than offset by increases in trading inventory and cash and other assets. Here, we also saw increased client balances being placed with us.

All said, we regretfully had a miss of our internal targets. And you should read this quarter's development in no way as a change in our stated objective to continue our tight balance sheet discipline. For the second half of 2014, we clearly expect to realize further reductions in our leverage exposure and remain well on track to deliver against our 3.5% target for 2015.

I move on to page 7. As you can see, we increased our litigation reserves to EUR2.2b and the contingent liabilities to EUR3.2b in the second quarter of 2014, reflecting principally the potential impact to the Bank of recent settlements by others. In the second quarter, we booked approximately EUR450m of additional litigation provisions, roughly 25% below our provisions of last year.

We are monitoring our legal cases very closely and ensure that all matters are at all times appropriately reflected. It is in our interests to resolve these matters as swiftly as possible. However, there is significant uncertainty as to the timing and size of potential litigation impacts beyond our influence.

Let me now turn to Group results, on page 9. You see that our Group revenues were down EUR355m versus the same period last year, and this is mainly driven by a non-recurring item in NCOU. I will discuss overall revenues in more detail in each one of the business division sections.

Let's turn to page 10. Credit loss provisions decreased materially from the second quarter of 2013. A significant part of the reduction was from lower credit losses for IAS 39 reclassified assets and a specific gain from asset sales in NCOU.

In our core bank, we continued to record very low levels of provisions for credit losses. These reflect on the one hand the current benign economic environment, and on the other hand demonstrate the consistently strong credit quality of our book.

Let me turn to costs, on page 11. Non-interest expense, as you can see, reduced by EUR257m from the second quarter of 2013 to EUR6.7b in the second quarter of 2014. While litigation costs were about EUR160m below the second quarter of the previous year, this was partially offset by higher policyholder benefits and claims.

Predominantly, the cost reduction was achieved in our adjusted cost base, which we see as our true operating cost base. Let me cover the details in the next page.

If I look at page 12, the adjusted cost base was approximately EUR200m lower than the same period in 2013. Our OpEx program continues to deliver and we realized savings of more than EUR250m in the second quarter. Our total OpEx savings realized today accumulate to EUR2.6b.

As highlighted last quarter, we continue to face higher costs related to regulatory audit and control requirements amounting to more than EUR200m in the quarter. These costs include the impact of approximately EUR45m from higher compensation costs related to the new CRD4 compensation rules. We estimate the full-year impact of CRD4 compensation expenses to be more or less around EUR300m.

Furthermore, we achieved about EUR100m additional cost reductions, for example, from the deconsolidation of BHF.

As I indicated in the first-quarter results call, we expect our full-year 2014 adjusted cost base to remain roughly flat versus 2013, despite the regulatory headwinds, and we are confident to reach the targeted accumulated OpEx savings of EUR2.9b by the end of 2014.

There have been press rumors about an extension of this OpEx program which are not accurate. According to our plan, the OpEx initiative allows us to achieve our cost/income ratio target of 65%. As part of our new culture, ongoing cost focus of course will remain an integral part of DB.

So let me move on to slide 13. Here you can see our pre-tax profit was EUR917m. Our net income in the quarter was EUR238m.

Our effective tax rate continues to be negatively impacted by non-deductible litigation expenses. In addition, this quarter's income tax expense also reflects adjustments for income taxes of prior periods. Absent those one-offs, we expect the effective tax rate to be between 30% to 35%.

On page 14, you see our reported Group post-tax ROE for the first half year was 4.7%. The core bank's adjusted post-tax return on average equity, applying a tax rate of 35%, was 13.4%, which highlights the strength of our underlying franchise.

Let me go on to segment results now. Let me start with CB&S, on page 16. As you can see, CB&S had strong results in the quarter, particularly relative to peers who have reported thus far. Revenues were flat year on year, despite challenging trading conditions in key products, and IBIT increased 17% as a result of lower expenses.

These results also underscore the improvements we are achieving in CB&S efficiency, as sustainable revenues and improved IBIT were achieved despite lower assets and headcount over the last year. Adjusted costs in CB&S, which exclude cost to achieve and litigation, were also lower despite higher regulatory related costs and ongoing investment in platform enhancements, which reflects the solid progress we are achieving on our cost reduction program.

The adjusted post-tax ROE for the first half of 2014 meets our targeted returns for CB&S, but we will continue to dynamically optimize resources in CB&S going forward.

Move on to page 17. You can see our debt sales and trading revenues held up well, despite a clearly challenging FIC market in the second quarter. Macro products, like foreign exchange and rates revenues, were lower and were particularly affected by low volumes, historically low levels of volatility and a reduced risk appetite by clients in the quarter.

However, that was offset by strong performance in a number of credit businesses, particularly in credit solutions. RMBS and flow credit also had good performances versus a difficult second quarter of 2013. The results this quarter underscore the breadth and diversity of our fixed income business, with strong franchises in key businesses and geographies.

Move on to equities. They also had a good result despite a challenging operating environment of low volatility and volumes and a challenging comparison, as the second quarter 2013 was a very strong quarter.

Cash equities was resilient, despite low volume. Equity derivatives were down, largely because of reduced volatility. Prime finance revenues were slightly up, year on year, as higher client balances were offset by lower spreads.

Page 18, you see that DB's global corporate finance revenue increased 10%, year on year, driven by both slightly higher fee pool and market share gains. DB ranked number five in global corporate finance, based on Dealogic fees, with a record 5.6% market share in the first half of 2014. In the second quarter, DB ranked number four in terms of market share. In EMEA, DB ranked number one with a 7.9% market share.

In M&A, revenues were up 18% year on year as we consolidated our market leading position in Europe and made significant market share gains in the US.

Our ECM revenues increased 30% year on year, driven by strong deal flow, especially in Europe. This was our strongest quarter since the fourth quarter of 2010. We ranked number five globally in ECM at the end of the second quarter 2014, with a 5.2% market share.

High yield saw a record issuance in the second quarter of 2014, after a weak first quarter. DB ranked number two in high yield at the end of the quarter, with an 8.7% market share.

Move on to page 19. As you can see, PBC also delivered a solid IBIT of EUR403m in the second quarter. Adjusted for cost to achieve, the pre-tax profit was EUR497m. The reported IBIT decrease the prior year second quarter was for one-off items last year of about EUR100m. Also, the decline to the previous quarter is largely due a one-off gain of EUR70m in the first quarter of 2014.

Lending revenues went up year on year, partially driven by solid volume growth. We are pleased that deposit revenues were resilient despite margin pressure from ongoing low interest rates. Cost to achieve decreased compared to the second quarter of 2013 and first quarter of 2014, but is yet expected to increase in the second half of this year.

Let me quickly run you through PBC's divisions, on page 20. Private and commercial banking showed stable revenues compared to prior year second quarter, largely benefiting from strong credit product revenues and also increased revenues from investment and insurance businesses. The IBIT decline versus the first quarter of 2014 was mainly driven by a one-off gain in prior quarter and seasonally lower investment in insurance income.

The IBIT development in Postbank was influenced by non-operating effects. Lending revenues increased, offset by lower deposit revenues due to the ongoing strategic volume reduction in Postbank.

Advisory banking international delivered a very stable IBIT development, as the second quarter 2013 was significantly higher due to a release from the Hua Xia Bank credit card cooperation, as you may remember. As you are aware, advisory banking international revenues are to a large extent driven by our investment in Hua Xia Bank.

So from page 21, to GTB. Our GTB business has been facing a significant change in the market environment since the Investor Day in 2012. Low interest rates, highly competitive margins and adverse FX movements significantly impact the top line while the underlying business trend is very encouraging, with volume growth counterbalancing the impact of external factors to a great extent so far.

In this environment, GTB revenues were stable year over year, even though the second quarter of 2013 included a gain from the sale of our Deutsche Card services business. The increase in provision for credit losses quarter over quarter is primarily related to higher provisions in the commercial banking activities in the Netherlands.

Non-interest expenses were affected by a litigation related charge driving the year-over-year increase. Furthermore, we invested in platforms to enable business growth and increased expenses to comply with regulatory requirements.

Page 22, I turn to asset and wealth management. Deutsche asset and wealth management delivered an IBIT of EUR204m in the second quarter. Excluding cost to achieve, litigation and impairments, the EBIT was EUR298m.

This quarter was the strongest in terms of net flows, with roughly EUR11b, mainly into higher margin businesses. Revenues developed positively versus prior quarter and last year, mainly benefiting from an increase in management fees and growing recurrent revenues. Furthermore, the disciplined execution of our efficiency program and portfolio optimization measures are positively impacting the cost base. Adjusted costs decreased by 2%, year over year.

On page 23, I cover the NCOU. As you can see, the NCOU reduced CRD4 RWAs by more than EUR2b at a net gain, demonstrating success at ongoing de-risking. From a leverage perspective, the balance sheet has also been reduced by a further 7%, mainly from asset sales.

In terms of financial performance, the net revenue line included a EUR300m loss from the restructuring of Maher Terminals' debt in the period. Excluding this impact, the second-quarter results represent a relatively benign quarter for the NCOU.

One driver is that litigation costs remain benign for this quarter. However, we expect the environment to remain a challenge whilst legacy matters are being resolved. We will provide more detail on the IBIT components in the appendix that you can then refer to.

If you look at page 24 and you look at the de-risking activity for the second quarter, we have completed specific CRE asset sales as well as further risk reduction in the credit correlation book. However, in terms of RWAs, this positive impact from de-risking was partially offset by other factors, mainly an increase in our market risk RWA calculations.

From a leverage perspective, the NCOU has progressed significantly against the reduction targets we set this time last year. We will continue to focus on balance sheet reduction over the coming quarters.

Let's turn to the last page, consolidation and adjustments. As you can see, consolidation and adjustments reported a pre-tax loss of EUR223m in the second quarter of 2014, compared to EUR205m in the prior year period. This includes internal costs related to our capital increase in the second quarter of 2014.

Before we are moving to the Q&A part of our call, let me comment on our regulatory reporting in the US in light of some media reports of the past days.

Like many of our peers, we are investing heavily into the systems and processes we need to ensure that we fulfill our regulatory reporting requirements. As we stated, we are investing EUR1b to ensure our systems and controls are best in class. We are dedicating 1,300 people to the effort, including around 500 being hired in the US this year.

We are building a long-term sustainable strategic architecture to meet this requirement. By its nature, that architecture is complex and will take time to complete. Nonetheless, we are confident that the program we have in place will fully address our regulatory reporting requirements within the necessary timeframe.

That said, please keep in mind that these statements refer exclusively to our regulatory reporting requirements. Our financial reporting has always been reliable and accurate.

With that, Anshu and I would be delighted to take your questions.

(Operator Instructions). Kian Abouhossein, JPMorgan.

Hi, Stefan and Anshu. Thanks for taking my question. I would like to focus in particular on two things. One is risk-weighted assets. You seem to have more or less already hit your targeted risk-weighted assets for the end of the year of EUR395b. You're slightly above that. And I'm just thinking -- wondering how should I think about risk-weighted assets moving forward for this year, but also into 2015, 2016, considering you're highlighting at least still some regulatory uncertainties impacting your capital base. That's the first question.

The second question is on assets. I'm just wondering, how do you manage asset reductions in terms of profits? On slide 34, you indicate EUR1.1 trillion of assets, roughly. I would have expected, in an organization with so much assets, you can just go out and indicate I want 10% asset reductions. And we've seen some other firms doing a lot of asset reductions, Goldman in the US in particular, in one quarter, and I just don't understand why it's so difficult to reduce these assets.

Was that all, Kian, yes?

Yes.

Yes, okay. Thank you for your questions, Kian. So let me tell you on the RWA. Obviously, this RWA increase is based on methodology changes, in particular for operational risk RWA. I think that's a trend you see in the industry in general, where we have updated our current modeling approach and changed it to include forward-looking components, and that's I think a change that we will see in the industry happening more. Obviously, the big operational losses that all banks are suffering are having an impact here.

Then we have a further CVA RWA increase that was in relation to the methodology changes that we have highlighted in our first-quarter communication. And the remaining RWA increase was business, due to investments in our businesses that are meant to stabilize the franchise platform in line with our early communication as well. That was obviously business related increases here as well.

So, overall, and you're right that we are at almost EUR400b longer-term target that we had. We expect this to continue to be more or less flat. Obviously, what I can't predict is some of the outcomes that obviously the ongoing uncertainties that I referred to at the beginning of my presentation might really mean. But our view is that we should be a bank around this level for the next two years, and then obviously, hopefully, business growth, etc., will allow us to continue to grow.

And if these regulatory uncertainties hit you with more capital that you highlight on page 4 -- sorry, on risk-weighted assets, there is a possibility that you adjust your risk-weighted assets to stay around EUR400b, or do you think there's a clear risk upwards if some of these things comes through like harmonization that you highlight, etc.?

No, we still -- first of all, don't forget we still continue to get rid of NCOU assets. That will be an ongoing effort, and as you know that's mainly driven by P&L. And we have been quite successful to have some flexibility here, because we have had net gains on our de-risking activities so far.

And second, yes, there is further management action we can take and we would take in case it is worthy -- let's say we would get significant additional RWA hits from any of this change. So we will -- in that sense, yes, we have flexibility and management ability to deal with it.

Now to your asset reduction question, that's a little bit -- I agree that more can be done always and that there's no technical impediment to doing more. But you know our current objective is to get to this 3.5% leverage basis, as I discussed at the beginning of my presentation. We accept that we are not particularly ambitious in terms of overachieving and early achieving leverage targets, because of our view on the meaning of them, and therefore we are pacing to get to our targets, the reduction. Can more be done? Yes.

Great. That's very helpful. If I may ask one more very quick one, July in terms of trading environment for the industry, how would you define it for fixed income? We're hearing mixed messages around July. How do you see the trends in the industry in fixed income?

I can't -- it's a little bit too early to really say trends. As you saw from my discussion around the quarter results, and you'll remember that even at the beginning of the quarter we're reporting about my guidance was also more negative. I've learnt not to take early developments into account, because you see what bit of a miss we had with that forecast. So please understand it's way too early to see any new trends developing.

Great. Thank you very much for your help.

Jernej Omahen, Goldman Sachs.

Yes. Good morning from my side as well. I just have a couple of short questions. On page 4, going back to the previous question, when you decided to expand the headwinds on capital from the impacts of single supervision, why did you decide to do that now? And what exactly, particularly on this bullet on harmonization of regulatory treatments across euro countries, do you have in mind? And are you essentially implicitly saying here that some of the more favorable treatment of Deutsche goes away as SSM kicks in?

And the second question I have, so can you just categorically say that you are still committed to the EUR382b, EUR395b risk-weighted asset target? And can you just indicate whether you expect risk-weighted assets to go up further in the third quarter before they come down, or do they expect -- do you expect them to fall from here?

And finally, on page 36 of your presentation, a slightly odd question, I guess, but you show that the loan book in your CB&S has increased from EUR42b, where essentially it was for a number of years beforehand, to EUR48b, which is a 15% increase in one quarter and I was just wondering what that is.

And finally, and a very straightforward question on the usage of the TLTRO, what are your plans currently? Thanks a lot.

So thanks, Jernej, for your questions. Let me start on this headwinds. Please understand this is a matter of caution. We have no indication of anything specifically or unspecifically to happen.

But we know that based on the way the AQR and then the later stress test is run and the objectives of the ECB around this, obviously the intention is to harmonize, the intention is to compare. And we are just being honestly very cautious in that. We have no indication that any of -- and I don't know what you specifically refer, benefits or whatever. We don't see any benefits. And I think previous comparisons of RWA have shown that we are in the midfield of comparisons in Europe.

So there's nothing specific other than being just conservative and just making the market aware that obviously we will have events in October and late October and at the beginning of November where certain changes may occur. So take this just as pure financial conservatism, without any direct indication.

On the RWA increase, obviously, again, we are firmly committed to our number to stay around the EUR400b for this year. And I bracket again my conservative statement from before, in part of what we can directly control in short-term control, we will stay around this number.

And then obviously, as our plan indicates, obviously we hope to be able to then be able to grow our businesses as the retained earnings allow us to achieve our targeted capital ratios, and therefore we'll continue to grow in the plan for 2015 and 2016. But this then obviously should hopefully then not be any methodology driven RWAs but a business driven RWA decision, according to our plan.

Now, the next question on the loan book, we had an increase in CRE loans as a reflection of very good business developments. We also had some short-term loan increases that obviously we expect to reverse. And as you know and I did admit, that we had obviously some miss in terms of our targets for the balance sheet, partially obviously resulting to the cash and partially also resulting -- and this was a CB&S issue in terms of how we manage our balance sheet there. Should be no indication that we are turning to increase our balance sheet.

The next question you had was around the TLTRO. We have no -- made no decision with respect to this participation. But I can also tell you we will be financially driven, if we make a decision for it, to understand the benefits of it.

Thanks for that. So, Stefan, on this EUR6b increase, you said it's commercial real estate lending, and that is international commercial real estate financing, I guess.

Structured finance, CREB, LDCM business, yes.

All right. Thank you very much.

Christopher Wheeler, Mediobanca.

Yes. Good morning, everybody. A couple of quick questions, really. The first one is on slide 6. You made some very enigmatic comments, Stefan, about the increase in exposure in the last few days of the quarter, in respect of the capital that came in. What exactly were you inferring here, in terms of what you might do with that exposure as we go into the third quarter? Would you be looking to perhaps redeploy that as part of the reduction in your total asset base?

And the second question really was about NCOU. You obviously made the point that you've made excellent progress since you set it up. But things seemed to slow down quite a bit in terms of both asset and RWA reductions in the quarter, where we -- a period when we saw a lot of other banks reducing quite dramatically some of their non-core legacy assets. Just wondering whether you're starting to hit the high hanging fruit at the moment and what you think the pace of reduction might be over the next, say, two or three quarters. Thank you.

Okay, Chris. Thank you for your questions. It's honestly a very -- on the balance sheet, it's a very easy thing. We got the cash in from our capital very late in the quarter, and normally obviously we manage our cash balances and we manage our liquidity and it just came in very late. So a large part -- and there was, let's not forget, only the cash from the capital increase and then obviously we had the additional cash from our AT1 issuance.

So if we adjust normally, we will manage and absorb, obviously, liabilities with it and it was just a timing effect that we couldn't. So that should not be seen as something that will be around in the third quarter, to answer your question.

Yes. So in straightforward terms, that will just fall away pretty well by the time we see the next set of numbers? Okay.

If we have more capital, we'll be able to absorb some of our short-term liabilities, and therefore obviously that should not be an issue. That was just a timing issue.

Now, in terms of your NCOU question, as we have really said at the beginning of this year when we laid out the plan for the NCOU, the NCOU is focusing very much on the operating asset disposal. And I must really say that they have been extremely successful with this. As you know, we sold BHF; we sold the casino. So I think there's excellent progress in terms of the operating assets.

We had told you and I think we've had one of the best NCOU performances on the street. We can really claim that. They've been running ahead versus their original plan. That's why they -- already last year, you see I reported that we had some benefits of a faster de-risking in NCOU than we had originally anticipated.

And of course now we have assets that will just take a little bit longer and our pace is expected to slow down, we said it in prior quarters, as we go. But we will continue to reduce, and you see there has been success in this quarter as well. It just will be slower paced than we had in the last year.

Okay. Thanks, Stefan. Appreciate it.

Welcome.

Stuart Graham, Autonomous.

(Technical difficulty), please. Firstly, on the EUR8.5b capital raise, what's the message that's gone to your traders now in terms of is it okay to take more risk, is there more tolerance? Is there some sort of strategic change in terms of how you think about the risk-taking capacity of the Group with the extra EUR8.5b? That's the first question.

The second question is on the leverage ratio. You keep talking about the 3.5%, but there was also this target of reducing assets by EUR250b. So is it the EUR250b that matters, or is it the 3.5% that matters? And if you get the 3.5% with less than EUR250b, that's fine?

And then the final question is back on slide 6. I get the point about the EUR8.5b and the EUR3.5b coming in late, but that's kind of EUR12b increase in cash and you had EUR29b increase. So I'm just wondering what the rest of it is, because that seems a very big increase versus some of the declines you've had in previous quarters. Thank you.

Stuart, this is Anshu. Let me take your first question. It's very easy. Absolutely no change in our trading patterns at all. This capital raise, as we've said many times, was intended to be a buffer to help protect the Bank against the considerable volatility that we were anticipating. Nothing has changed on that front. Our operating strategy in CB&S remains unchanged to what it was prior to the capital raise.

Clearly, the capital raise has made a difference, but it's more of a psychological difference in some ways, which is allowing us to win business. Absolutely no changes, either now or in the future, in terms of messages to traders.

Stefan will take your next two questions.

Stuart, first of all, on the leverage ratio versus these two targets, we still need EUR250b to get there. So I think it's just a mathematical question. What we wanted to switch only in our guidance, that what's important for us is to hit the ratio at the end. We're going to always be measured by a ratio, and that's why you hear this slight change in tone. But we still need this amount to get there, and obviously we have that in our plan.

So the EUR250b, in that sense, we don't use as a full target anymore, but we say we need the EUR250b to get there, not as a communicating. I wouldn't read more into it. There's nothing other than at the end of the day what will count longer term is the ratio itself, and that's obviously what we're targeting.

Now, on the cash coming in late, it was EUR14b of cash that we had surplus, which was part of the raise. The remainder is just other assets, for example including the EUR7b loans we talked about. And I did admit, I said that we just had a miss in -- we normally set balance sheet targets for our quarter end and obviously we manage our balance sheet accordingly, and we just had -- in terms of some settlements, etc., we just had a miss at quarter end.

Please also here I can say don't read anything in terms of a directional change or anything; was just more of an operational mishap. So these two effects were the two effects that created this increase in balance sheet this quarter, and both of them are things that we can very shortly get rid of. Again, there's nothing occurred here that puts at risk our reduction plans, and we continue to be confident that we will be able to drive down our balance sheet over time. And the current maths still shows EUR250b to get to our ratio.

And just so I understand how on top of these things you are, at the time of the rights issue you were still guiding for trading revenues to be weak in the quarter. Obviously, June was much better. So was it an environment where it's like, okay, the trading's been better than we expected, we don't have to worry so much about missing at the end of the month, whereas if trading had been poor you would have been much more focused upon making sure because you didn't want to do a call where you missed on P&L and you missed on the balance sheet?

Implying that there was a deliberate attempt to let the balance sheet go? Once again, I will reiterate no correlation.

Not a deliberate attempt, just you're a bit more relaxed about it because you knew the P&L was better than you'd talked about previously.

No, not the case.

Okay. Thank you.

Andrew Lim, Societe Generale.

Hi. Good morning and thanks for taking my questions. Can I start off with the high taxes and the litigation? You're saying here that the litigation provisions are non-tax deductible. Is that always going to be the case going forward, because I see different treatments at different banks?

And working on the premise of high taxes, that's obviously depressing your net income so you've only got like EUR238m net income this quarter. So what implications does that have for your dividend per share? Is that going to be held at the same level of EUR0.35 for this year, or is it still open for question? And of course I'm asking this because you've got a big increase in your share count, so your dividend expenditure in aggregate would be a lot higher than it would be last year if you kept the EPS the same.

And then a question on a missing slide. I think you've taken away a slide on the increase in your leverage exposure due to the latest BCBS proposals. Last time you showed it was EUR140b, and I think you mentioned last time it was EUR100b extra on the leverage exposure. Could you update us on how much that is for this quarter?

And then lastly, just a personal request; if you could possibly report your results on a different day to UBS, that would be very, very much appreciated. Thank you.

I hope on your next call you make the same request, that UBS report. I understand that that's a little bit unfortunate, but obviously that's driven by obviously our internal committee structures and ad hoc requirements as well. So regretfully it's just not just a pure easy decision to make. It is tied up with obviously a lot of other considerations. So please understand, but that's how we're trying to accommodate you as good as we can.

Let me cover the high taxes. First of all, it's just a rule. I think they should be no different for any bank, that fines are not tax deductible. And therefore, obviously, whenever we put reserves aside for fines, we cannot add tax on it, and I think that's just how it is. And in this quarter we obviously had an impact to it, because we put money aside for further fines that we expect, according to the close monitoring that we have in all our legal expenses, and that increased our tax line and therefore obviously increases our tax expense.

And then the second, as I referred to, was this external -- was obviously the external factor that we had a prior year tax expense. You know we get, obviously, discussions with tax authorities about, but the world has changed quite a bit. As you can read out of the press everywhere, we have to be more conservative in terms of interpretations and rulings on tax. And this quarter, which you really should see as a one quarter one-off at the moment, we added to our tax provisions for a prior year tax expense. That's what happened here.

On the dividend, obviously the dividend decision has always been made after the year is over, and it's a decision that at the end gets done by Supervisory Board and then agreed upon by the AGM. So our behavior during the year is we will always accrue to the prior year dividend, and that should not be an indication of any decision we may take at the end of the year. And obviously we kept the EUR0.75 per share, despite the fact that obviously we will have now a higher share count after the capital raise. So that's how you should understand this.

Then, on BCBS, obviously not on purpose there. I thought you might be bored by now on this endless discussion of different exposure measures. The numbers stays about -- we have to say guidance at the end. It's around a EUR100b higher exposure at this point in time. And I think in previous calls I also referred that our EUR140b, I think, was the number exactly. So I think that's the number we have been tracking, so something between EUR100b to EUR140b more in exposure measure.

And again, what -- the question here is what's going to be the final ratio going to be. Is it going to be 3% or 4%? But it's too early to tell. But I think we will be able to cover any of those definitions, as far as we can see today from our planning.

I hope I have all your questions.

Sorry, just to clarify, do you accrue to the previous year's dividend per share or the --?

Yes, per share, EUR0.75, with higher share count. So we are putting more money aside, yes.

All right, okay.

Because it's -- we do it per -- EUR0.75 per share. That's what we accrue to. But please, no indication of decision. This is what we financially do.

Of course. Okay. Many thanks.

You're welcome.

Robert Murphy, HSBC.

Sorry, my fault. I just wanted to come back to the contingent liability increase on the litigation slide. I think it's slide 7. Could you say what areas that's related to?

And then, secondly, in terms of the rep and warranty slide, on the right-hand side there, can you say what the actual revenue impact has been, say, on average last year and how much it was in Q1 and Q2? Thank you.

Okay. On the -- it was mainly US RMBS, by far. That's what it was, the contingent increase. And I referred to other banks' expenses in that. As you know, that's how the system works.

And then, on reps and warranties, we have to go back to you. I don't have an answer to that question here.

I had a follow-up as well on the private and business clients. You talked about a more stable revenue comparison, ex one-offs. Can you say what the outlook is for revenue growth in that business, if you look over the next two or three quarters, and how much margin pressure is going to still weigh on the revenues there?

We see -- in a couple of our stable businesses, we see quite interesting developments. That's also valid for PBC. We continue good on the volume front, but obviously interest margin -- interest rate development is having its impact on IBIT. And that's why we also expect that we have continued interest rate pressure and -- but an ongoing increase in investment products, so that volumes go up, but margin pressure moves IBIT down. So, regretfully, the good volume development we cannot show.

The positive about this; once we have a turn in interest rate, obviously we will have rapidly picking up IBIT in these businesses.

Yes, but we don't really have any detail on margins, but can you say what the gap is between the margin on new business versus the back book or something in there, just to give us an idea of the re-pricing impact, when that [fades] out?

Probably, to come up with an average number there is probably not conducive, because obviously of the mix effect, different products. But I think you've seen the decline in interest rates is quite significant, so you can assume that new business obviously is impacted by it.

Okay. That's it from me. Thanks.

Andrew Stinson, Bank of America.

Clearly it's been a good quarter for the FIC front. I was just thinking back to what Stefan said on the capital raise call, that you're not allocating capital to the businesses according to leverage just yet. I'm just wondering if that's one of the reasons you're able to compete fairly effectively at the minute. And I'm just -- I guess just if you could talk around that, because I'm just a bit worried that maybe some of these gains in market share, either they're not economical from a leverage standpoint or that they -- maybe they reverse once you do start applying a leverage filter when allocating the capital.

No, I wouldn't say that our market share gains have much to do with balance sheet deployment at all. As we've said a couple of times before on this call, our plans on both balance sheet and capital as far as CB&S is concerned remain unchanged materially from before the capital raise.

The market share gains that we have seen in the second quarter are very broad based. We've said that we've seen market share gains in corporate finance, in M&A, in debt capital markets, none of which would have much to do with balance sheet areas. And actually, the balance sheet dominant areas, which are flow, foreign exchange and fixed income, continue to be very challenged, both in absolute and relative terms.

Okay. Thanks.

Kinner Lakhani, Citi.

Yes. Good morning. So the first question was on your OpEx program and the residual cost savings that you're targeting. Just wanted to see if you could give us some guidance of how you see the balance in terms of the split by division.

Second question, on resolution fund, any updated thoughts on what kind of increased contribution that you could see over the coming years?

And third question, on the NCOU IBIT disclosure on slide 32, which is very helpful, we're trying to get a better feel for how you see the fadeout and resolution component of that materially resolving by end 2015, as you say in the outlook statement.

The questions on OpEx, I don't think we have an allocation to the different business divisions. It's pretty across. We had originally provided some split. If you go back to some of our old presentations you may see it, and we're pretty much in line with this split. We have actually not really changed any of these targets from a division standpoint. So I think you can apply the same spread that we had, more or less, if you want to do the math.

So you think all divisions are running roughly the same pace?

Same pace, but they had individual targets, so those targets that we had originally disclosed of how much OpEx savings per division. I think there was a previous presentation on it, and just use the same percentages, more or less. There's nothing much moved through --

I'm thinking more about the residual cost savings, if the residual is at the same pace.

Pretty much. It's pretty much in line, if you want to apply the math. It's been -- with some of them obviously we have had -- obviously our focus is on achieving it on Group level. That's important to us. But our split, if you want to calculate a split, the timing of these, there was no big difference between how the timing of cost savings will come in divisions. All of them had short-term, low-hanging fruit. All of them had longer-term projects that would be realized. So I think just apply these percentages, and I think you should be broadly in line.

Now, on the resolution funds, there's no final quantification available. We currently obviously expect increased expenses, which we have now put into our plan in the future. So it is part of our capital plan already. But it's very difficult for us to make any statements around how big this expense is. We need to know more detail and understand.

And last, on the IBIT disclosure, on fadeout and resolution, we did provide you so you understand a little bit these dynamics, because there's so much movement into the P&L. Fadeout and resolution obviously is a part that I told you, that they're low-hanging fruit and the fast and easy disposals are behind us, and that's going to move at a little slower pace now. We've indicated that in a couple of the last quarter calls, that that was our expectation for the year.

As you saw, this year was a year where we especially wanted to focus on our operating assets. And as you also saw in this quarter, if you look at the charges, for example, we had with Maher, we continue to work. We got rid of BHF. We sold BHF. We sold the casino. We are working obviously, as you can see, on our P&L this quarter on the ports, and that has been the focus of NCOU, this, whilst obviously we will continue at a slower pace on that de-risking of our ongoing assets.

But I did make you aware that there is a longer tail that will be with us for a little bit longer time, and that we will continue to behave economically rational in terms of capital creation, in terms of as we continue on with the ongoing de-risking of NCOU.

Thank you, Stefan.

Okay.

Omar Fall, Jeffries.

Good morning. Two questions, please. Firstly, could you give us some color on the rates business within FIC and how that's behaved through the quarter, and particularly through the upswing in June? We know credit revenues recovered, thanks to somewhat better volatility in that month, but I'm curious to know how your rates business behaved over that same period, and in particular just some commentary over the structural versus cyclical rebasing that we've had.

Secondly, could you give some more color on the EUR7.8b increase in operational risk, and apologies if I missed that earlier? Is that just a broader model update or, as we've seen for some of your competitors, is it linked to a particular issue that was driven through by regulators? Thank you.

On the rates side, we see challenges which are both structural and cyclical. We expect these challenges to continue. There is some evidence that we are taking market share, particularly in Europe, where the fee pools are consolidating towards firms that remain committed to the space. But I wouldn't say it was a major contributor to a better second-quarter performance, and frankly I expect the headwinds to continue.

Okay. And, Omar, on your question about the op risks, I did refer some in previous statements but no problem today. It was mainly methodology changes in terms of operational risk RWA, where our current modeling now approach has changed and it includes forward-looking components. So it is a broader model update, which obviously includes a number of smaller changes.

And the main change, if I can synthesize that, is really the fact that we've had so much litigation in the industry that models have to consider now, on a looking-forward basis, operational risks related to that. And that's -- I said there's no -- it's just a methodology question on how you approach it.

Great. Thank you very much.

Excuse me. There are no further questions at this time. Please continue with any other points you wish to raise.

Thank you, operator. This is John Andrews again. We'd like to thank you for your time today. Obviously, you can follow up with the IR team here at Deutsche with any further questions you may have, and otherwise we wish you a good day.